Horror Story 1: Can you safely spend your Social Security benefits?
Imagine you become disabled, lose your job, go through the horrible stress associated with adjusting to your new status, apply and start collecting disability benefits and then discover you can do something you didn’t think you could do: namely, write. You write a children’s book and it does well and you start receiving royalty checks. All this happens in 1996. You then immediately realize that you need to check with Social Security if you can still receive your disability checks. You check and they say royalty income is not the same as labor income and it doesn’t affect your ability to collect disability benefits. You still can’t believe this so you check many more times over the years. Each time you are told the same story. “Royalty income does not affect the receipt of disability benefits.”
Then 10 years later, in 2006, out of the blue, you receive a letter from Social Security demanding repayment of $309,000! You also learn that Social Security wants to take back the money it provided your children in the form of child benefits.
You go through the long and arduous appeals process. A judge decides that because you went on some book tours, your royalty income is not royalty income. So what you were repeatedly told — royalty income does not disqualify you from collecting Social Security income — was true but not true.
An appeals judge rules that even if Social Security was at fault in sending you payments you are liable to repay unless you were without fault. The appeals judge decides you were without fault because you consistently informed Social Security that you were receiving royalty income. But then the appeals judge says it is OK for Social Security to claw back your benefits if doing so wouldn’t defeat the purpose of the law. He then examines how much you spend on vacations, purchases on home improvements, cars and everything else. Following this forensic examination, which includes statements like, “She also paid $662.07 for a clutch in April 2015,” and “She has an expensive cable plan,” the judge decides you are liable for the $309,000.
I find this simply appalling. You are told royalty income is not a problem, you repeatedly, year after year, tell Social Security about your royalty income, a decade later you get a bill for $309,000. You appeal and after a decade you learn that it was all Social Security’s fault, you did everything right, you told them all about your royalty income, but you gave a few talks about your book, so we’re now going to called the royalty income earned, not unearned income. Furthermore, since you spent money on a clutch, took a vacation, did home improvements, etc., it wouldn’t be unjust for us to claw back the $309,000. So pay up!
This truly feels like Russian justice.
Horror Story 2: Taking disability benefits can produce no benefits and a huge tax bill.
Janet Novak, Forbes’ personal finance columnist, wrote this amazing and dismaying story about a federal worker, I’ll call him Joe, who was receiving workmen’s compensation and applied for Social Security disability benefits. Social Security awarded him disability benefits, but they reduced Joe’s disability benefits to zero because they deduct workers’ compensation benefits. But then Joe gets a 1099 from Social Security for the disability benefits he never received. He ignored the 1099. Next the IRS went after him and his wife, claiming that the gross not the net disability benefits are taxable income and that he and his wife owe taxes on 85 percent of the disability benefits he never received. Here’s the huge takeaway: If you are receiving workmen’s compensation, you need to think many times over before filing for Social Security disability benefits.
Horror Story 3: If you filed and suspended before the deadline, don’t listen when Social Security calls.
A gentleman emailed me in great alarm. He had filed for his retirement benefit and suspended its collection in April before the April 29th deadline. He did so intending to have his wife collect just her spousal benefit starting in two years when she turns 66. He received a call from a staffer at Social Security saying she was processing his paperwork, but that he had made a mistake thinking his wife could collect just a spousal benefit when she reached 66 and let her own benefit grow through 70. In order to do that, she said, her wife had to have been 66 before April 30. She then asked him if she should continue to process his request to file and suspend his retirement benefit.
Fortunately, he wrote down the staffers name and phone number. I called and spoke to her. I mentioned the gentleman’s name and that I was calling on his behalf and thought she had given him the wrong information. I said I had considerable background on the topic and had co-written a bestselling book on the topic. She then embarked on what I can only describe as a half-hour tirade in which I got in only .005 percent of the words. At the end, when she said she had to go, I asked her to double check and take down my phone number as I was going to write about our discussion in my PBS NewsHour column. Ten minutes later, she called back and apologized and said I had been right and that I had no idea how many people they have to deal with and that it was overwhelming.
I don’t mind Social Security staff getting things wrong. I expect this will happen. The top brass has failed to train people properly and provided misleading instructions. The staff are also incredibly underpaid and overworked. But the arrogance is what gets me.