The question I was asked today was about someone who was furloughed, and age 65. They were told to apply for Social Security when they applied for their unemployment benefits. Questions were whether this was a good idea in general, whether it could be made a good idea by taking the Social Security money and investing it when it wasn’t needed, and whether taking Social Security before your full retirement age (currently age 66) would impact the scenario differently.

Great questions.

First, let’s address the timing of taking Social Security general, and this concept of investing the difference. That deserves a whole separate post, which I haven’t gotten to yet, but in short it isn’t a good thing to plan on. Leaving the money to grow in Social Security, at 8% a year, is much less risky than what you’d have to invest in to try to get an 8% return every year for the next few years. Second, if you take your Social Security later, the larger the dollar amount your cost of living adjustment percentage is worth in the future, for both you, and if applicable also your surviving spouse.

Then let’s talk about penalties.

If you earn $75,000 per year usually, but now are furloughed from May-December, you still earned $31,250 in January-April. Because at age 65, you are below your full retirement age, the Social Security Administration will permanently and irrevocably deduct $1 from your Social Security benefit for each $2 you earn over the annual limit. That annual limit is only $18,240 in 2020. That means our example earner is already over the limit by $12,830 even if they don’t earn a penny in 2020 past the end of April. That results in a penalty of $12,830/2 = $6415 kept from your Social Security check.

And in Minnesota, an average annual benefit is $19,069, or for 7 months that’s $11,124. Minus $6415, and you’re only netting $4709 from claiming early. Now imagine, in 2021 you’re back to work; if you’d been 63 in our example, the penalty continues, and you make your full $75,000, planning to draw Social Security. $75,000 > $19,069 x 2 , you don’t get any of the growth of your Social Security benefit and you don’t get any direct benefit either.

If 2020 is the year you reach your full retirement age (maybe you’re 65 now, but turning 66 this fall), it’s not quite as bad. The penalty then in our example is $12,830/3=$4277. Less steep, but still money you didn’t need to have given up if you could have waited. Fortunately in 2021, being at full retirement age, the penalty goes away and you can continue to earn your paycheck as well as collect unpenalized Social Security.

Conclusion: It is true, that Social Security dollars won’t impact your unemployment benefits*, and unemployment benefits won’t trigger the claw-back on Social Security. But it’s another one of those strategies that if it isn’t necessary for you RIGHT NOW for keeping your head above water financially, with a place to live, heat, and food on the table, it’s probably not a good one.

So for most people, deep breath, these are not the financial solutions you are looking for, yes that usually means doing the hard things in the short term (just like in everything else) and tightening your financial belt.

* Footnote: This wasn’t true nation-wide until recently, here are some links on that if you are curious about the history. Minnesota used to reduce your unemployment check based on your Social Security income, wasn’t that a fine kettle of fish.

• https://www.nelp.org/blog/victory-finally-for-unemployed-seniors-in-illinois/
• https://www.aarp.org/work/social-security/info-10-2012/can-i-get-social-security-and-unemployment-benefits-at-the-same-time.html
• https://www.cnbc.com/2020/04/09/what-you-need-to-know-about-unemployment-and-social-security-benefits.html