In spite of the largest cost-of-living adjustment in 40 years, some people will open their statement from Social Security and see that the payment they received actually went down from last year’s. What are the possible reasons this could have happened?
There are several reasons, and I’ll run through some of the most common reasons I see, and how to avoid them.
Earned too much last year
If you’re under Full Retirement Age and are collecting Social Security benefits while still working, there is a limit to the amount of earnings that you can receive. Once you go over that limit, Social Security will withhold benefits from you in the next year based on how much you went over. For 2021 the earnings limit was $18,960 – and so for every $2 that you earned over that limit, $1 of benefits is withheld.
But they don’t just withhold $1—when you’ve breached the income limit, Social Security will withhold a full month’s check to cover their overpayment to you. Then in the following year, whatever the difference was (between the amount they should have deducted and the full amount of your payment) will be added to your first check of the year.
For example, let’s say you earned $500 too much last year (so $250 is to be withheld from your benefits), and your benefit at the beginning of this year was to be $1,000 per month. Social Security needs to claw back that $250 – and they do so by withholding your first check of the year. Then next year, you’ll get a refund of the extra $750 that was withheld.
The only way to avoid this situation is to stay below the earnings limit. The exception is that once you’ve achieved Full Retirement Age, there is no longer a limit on your earnings. You can earn as much as you like and it will not negatively impact your Social Security benefit.
Changes to Medicare coverage
This is relatively easy to understand. If you made a change to your Medicare coverage, such as adding Part D, this will cause a deduction from your Social Security benefit check, which might result in your benefit check being smaller.
Medicare premium surcharge
Also related to having earned too much, but this one occurs at any age after you’ve begun receiving Medicare benefits. The premium surcharge applies when you have had too much in taxable income (not just earnings from a job) two years prior to the current year. That’s right, if you’re getting a Medicare premium surcharge applied to your 2022 Medicare premium, it’s based on your income in 2020. If you earned more than $182,000 in 2020 (as a married couple, half that as a single) then you’ll likely see a surcharge for 2022.
This surcharge (known as IRMAA, for Income Related Monthly Adjustment Amount) most often applies because there has been an unusual increase to your income. A Roth conversion, sale of investment property, or sale of stock are often the cause of such an increase to your Medicare premium. It could also apply if you recently retired — although this change would give you the grounds to appeal the increase.
If the increase to income was a one-time event (such as those described above), then your Medicare premiums should resume the normal level next year, or as soon as your income returns to normal levels. To avoid the IRMAA surcharge, pay close attention to your overall income and try to stay below those levels if possible.
WEP or GPO
If you have just begun receiving a pension from a governmental entity (or other organization) which is based on income that was not subject to Social Security taxes, WEP or GPO could be the culprit to reducing your Social Security benefits. WEP (Windfall Elimination Provision) applies primarily to Social Security benefits based on your own earnings, while GPO (Government Pension Offset) applies to Social Security spousal or survivor benefits.
WEP can reduce your benefit amount by up to 50% of the first bend point (don’t let the techy jargon bother you, a bend point is just a part of the benefit calculation formula), and this can be as much as $512 a month for someone who reaches age 62 this year. The amount is adjusted annually and is always based on the year that you reach age 62. WEP can never be more than 50% of your total Social Security benefit, nor can it be more than 50% of the monthly pension payment that you’re receiving (or the monthly equivalent if you took the pension as a lump sum).
GPO on the other hand, is directly related to the amount of the pension that you’re receiving. Two-thirds of the monthly pension payment will be deducted from your spousal or survivor benefit due to the GPO.
For more details on WEP and GPO, I invite you to review the article GPO and WEP—When Do These Apply? It will help you understand these two provisions a bit more, and there are additional resources to round out your research.
Increase in withholding tax
This is a simple one: If you made a change to the withholding tax on your Social Security benefits, this can result in an overall reduction in your benefit check. Sometimes this was done earlier in the year and scheduled to be applied with the first check of the new year and we forget that we made the change.