If Social Security overpays you, you pay for the mistake

Investing

Suppose Social Security makes a mistake in determining your benefits. Guess what? Their mistake becomes your mistake, and they will bill you for any amount they overpaid you, even if they told you the benefits in question were yours to collect.

This happened to the husband of a woman whom I’ll call Dana to protect her identity. Let me call her husband Sam. Here’s Dana’s description, which I’m blending together from several exchanges.

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Dear Larry,

In 2014, my husband, Sam, retired. He was 64. I was 67, and decided to keep working and delay taking Social Security until age 70 to max out my benefit. We were advised by financial planners to call SS and have my husband take the spousal benefit.

We went to the SS office and they said he was entitled to a spousal benefit if I filed and suspended. They told us that he could file later for his own retirement benefit when it would be higher.

We did this, and he received about $975 per month. Social Security sent us statements saying this was his reduced spousal benefit.

As he’ll be 66 in July, Sam called Social Security in May to file for his own retirement benefit and was told that he would start receiving his full retirement benefit of about $1,600 in July.

Social Security called last week to say that they had made a mistake, and that because his full spousal benefit was more than half of his own full retirement benefit, he should never have received an early spousal benefit at all. They admitted that this was their mistake. But they said we would have to pay back $27K!

What recourse do we have? We don’t have the resources for an attorney.

Thank you so much,

Dana

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Social Security did, indeed, make an unbelievable mistake. Anyone who knows Social Security’s rules knows that there is something called “deeming,” which applies to anyone who files for a spousal benefit before their full retirement age. (Under the law passed in 2015, deeming will apply regardless of when one files for a spousal benefit in the case of those who were under 62 on Jan. 2, 2016.)

Deeming means that if you file for a spousal or a divorced spousal benefit, you must also file for your retirement benefit. (Deeming also requires you, if eligible, to file for a spousal or a divorced spousal benefit if you file for your retirement benefit.)

The impact of deeming is that you collect your retirement benefit — which will be reduced if you are filing before full retirement age — and, if you are eligible, an excess spousal or excess divorced spousal benefit. Your excess spousal benefit will be zero if your own full retirement benefit exceeds half of your spouse’s (or ex’s) full retirement benefit.

Because his own full retirement benefit exceeded half of Dana’s, Sam should not have received an excess spousal benefit when he filed before he’d reached full retirement age. But Social Security paid him thousands of dollars anyway — in full, not excess spousal benefits. How Social Security came to do this escapes me. They had Sam’s SS number, they had Sam’s own earnings record — surely, their software understands and applies deeming?

Anyway, Dana and Sam are now in terrible shape. They owe $27,000 and are barely getting by as it is. Mistake or no mistake, there is no way Social Security will drop this matter. Ideally, Dana and Sam should treat the $27,000 as a sunk cost, repay it, have Sam file for his full spousal benefit (which he is eligible for because he’s now at full retirement age, when deeming does not apply under the old law and he’s grandfathered in), while delaying taking his retirement benefit until he’s 70. Dana should restart her retirement benefit at 70.

But they can’t afford to repay. So, another option is for them to have Social Security retroactively fix its mistake. In this case, Social Security will owe them the difference between Sam’s reduced retirement benefit and his reduced full spousal benefit for a two-year period. This money may get them through until Dana restarts her benefit when she turns 70. At this point, Sam can suspend his retirement benefit and restart it at age 70 at a roughly 28 percent higher level.

The moral to this story? Triple-check that Social Security isn’t overpaying you. If they are, they can and will come after you — years, indeed, decades, later.