A Retirement Scenario

Picture this:  You’ve worked all your life in your chosen profession and are getting tired of the rat race. You’re 62 years old and comforted to know that you are now eligible to collect Social Security.  You will get a retirement pension from your career, and you have some money in your “nest egg” to tide you over in case of emergencies.  So, you retire from work and apply for your Social Security benefits, confident that between  your monthly pension and your Social Security check, you will have enough to make it financially in retirement. Sounds like a good plan, right?  Well, maybe not so good.

After retiring and receiving your pension and Social Security payments, you are dismayed to find that you are struggling to make ends meet. Turns out your monthly Social Security payment is less than you expected (because it was reduced for claiming early), and you’re hesitant to start depleting your retirement nest egg so soon after retiring. So, you seek, and find, full time employment to supplement your income during your “retirement.”  And that works well for a couple of years – until you receive a notice from the Social Security Administration telling you they have paid you more than you are entitled to. Not only that, but you must also repay those overpaid amounts – likely tens of thousands of dollars – immediately or they will withhold your monthly SS benefits until they recover what is owed. Needless to say, your financial world in “retirement” just came tumbling down.  So, what caused this to happen?  Introducing a Social Security rule known as the Annual Earnings Test (AET).  The AET limits how much a beneficiary can earn from working while collecting early Social Security benefits, and it is all too often the source of financial hardship for seniors who rely on Social Security to fund their “golden years.”

How the “AET” works

Each year, several Social Security thresholds change to keep pace with inflation. Annual change to the average national wage also affects Social Security’s rules. An increase to the Average National Wage Index (ANWI) will result in a corresponding increase to Social Security’s threshold for its Annual Earnings Test (AET). The AET restricts how much a beneficiary can earn from working while collecting SS benefits before reaching their full retirement age (FRA). For 2026, that limit is $24,480, and if your work earnings exceed that amount, Social Security will assess a penalty of $1 for every $2 you are over the annual limit.¹ To assess that penalty, SSA will issue an Overpayment Notice detailing how much is owed and how it can be repaid. And since Social Security relies on the IRS to find out how much your earnings were each year, the Overpayment Notice from SSA usually doesn’t arrive in your mail until well over a year after you file your income tax return with the IRS. All of which means that, in the scenario described above, you will be looking at a surprise bill from SSA for many thousands of dollars, which you have little choice but to repay. In other words, your earnings from working put you over the AET limit, so you must repay Social Security a substantial amount of the SS benefits you were paid. A nightmare, for sure!

Can the Overpayment be appealed?

The most likely reaction to receiving an Overpayment Notice is “how can I avoid repaying this amount?”  And the answer is, you likely can’t – especially if you simply neglected to tell the Social Security Administration (SSA) that you have returned to work. That you didn’t understand the ramifications of working while collecting early benefits will likely be met by Social Security with an attitude of “ignorance of the rules is no excuse.”  Nevertheless, you can always submit an appeal for a Social Security decision, by taking the following actions:

• File a Request for Reconsideration (Form SSA-561)

SSA-561 should be used if you do not believe you have been overpaid, or if you believe the amount of overpayment is incorrect. This essentially results in  someone at the SSA reviewing your case again to ensure it accurately defines the issue. That review is done by an independent agent at the SSA, who will analyze all information used to arrive at SSA’s original decision and verify its accuracy. That review can take from 1 to 5 months, depending on the complexity and SSA staffing, but it will result in either a confirmation of the original decision, or a more positive outcome in your favor.

• Appeal to an Independent Administrative Law Judge (Form HA-501)

If your Request for Reconsideration does not turn out in your favor and you wish to appeal further, you can request a hearing before an independent Administrative Law Judge (ALJ). This option can be either participatory (with you in attendance) or nonparticipating (the ALJ will separately and independently review the facts of your case). In either case, the ALJ will render a determination and advise you of their decision, usually within 1-3 months after their review. If that hearing does not turn out in your favor, other levels of appeal still exist, including a review by Social Security’s Appeals Council.  And, as a last resort, you can also file a civil suit with the U.S. District Court to hear your case. Many who fail to obtain a satisfactory outcome for a Request for Reconsideration and who wish to appeal further choose to engage an attorney to represent their interests.

Note that all appeals must be filed within 60 days of SSA’s notification to you of the issue.

Other Options

If, after filing the Request for Reconsideration, you agree that overpayment has, in fact, occurred, you have two options besides repayment as requested in the original Overpayment Notice:

• If you agree that you have been overpaid, but you believe you should not have to pay it back because you did not cause the overpayment and you cannot afford to repay it, you should file Form SSA-632, Request for Waiver of Overpayment Recovery

• If you agree that you have been overpaid and are willing to pay it back, but cannot afford to pay it back at the rate SS requests in the Overpayment Notice letter, you should file Form SSA-634, Request for Change in Overpayment Recovery Rate.

Avoiding Social Security’s Overpayment Notice

In the sports world we say, “the best offense is a good defense” – an adage that is certainly true when it comes to Social Security and the issue of working while collecting early benefits. When you submit your application for Social Security benefits, you will be asked if you have any plans for working. If you do, you will be asked about those plans, and Social Security will adjust your monthly payment schedule to avoid overpaying your benefits. Thus, by telling SSA in advance you shouldn’t get an Overpayment Notice (unless your actual earnings are substantially more than you originally told them).

Social Security also requests that if you are not now working but return to work after you claim, or if your previously estimated annual earnings are more than you originally stated, you should contact Social Security to inform them of your new expected earnings amount. In this way, Social Security can adjust your payment schedule in advance to avoid overpaying your benefits. In the end, Social Security does not want to overpay your benefits because they know that it usually results in hardship for the beneficiary – either a substantial and unexpected cash layout, or cessation of benefits for a period of time, neither of which are pleasant.

So How Can I Prevent This?

To avoid that dreaded Overpayment Notice and suffering a complete disruption of your retirement plans, we suggest the following:

• If you are collecting early SS benefits, stay informed of the annual earnings limit (which changes each year). If you will not exceed the annual earnings limit, no action is required.
• If you have already claimed your SS benefits and are working full time, and expect to exceed the annual earnings limit, be sure to inform the Social Security Administration of your anticipated annual work earnings as soon as possible. Social Security will work with you to avoid overpaying your benefits.
• If you have not yet applied for Social Security and you are still working full time, consider waiting until you either reach your SS full retirement age, or stop working full time, to apply for Social Security. Your SS benefit will continue to grow until the month you claim (up to age 70).
• Remember that the annual earnings limit goes away after you reach your SS full retirement age. Thereafter, you can earn as much as you like from working and your SS benefits will not suffer any negative consequences.

The last thing you want to happen is to receive an Overpayment Notice from Social Security that you owe them many thousands of dollars, which you must repay.

The Nature of the Issue

Overpayments of Social Security benefits occur for several reasons, and the SSA is trying hard to reduce the number of uncollected overpayments. Currently, the SSA has about $23 billion in total outstanding incorrect benefit payments, nearly 25% of which have been caused by overpayments because of the Annual Earnings Test. Overpayments are, essentially, part of Social Security’s Accounts Receivable ledger, but an entry which the agency finds especially difficult to collect. The Association of Mature American Citizens (AMAC) has suggested, as part of its Social Security Guarantee proposal to Congress, to eliminate the Annual Earnings Test (AET). We believe this would result in reduced workload within the Social Security Administration, would lead to more Americans working while collecting early benefits and, thus, provide more revenue from payroll taxes for the Social Security program – a program which needs reform very soon. You can review a summary of AMAC’s Social Security Guarantee here.

This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website (amacfoundation.org/programs/social-security-advisory) or email us at ssadvisor@amacfoundation.org.

1. During the year you attain full retirement age (FRA), the affect on your benefit is less punitive. ↩︎