Every year, thousands of people receive larger benefits from the Social Security Administration than they're legally entitled to. And although this may seem like a great deal for the recipients, the reality is that it can come back to haunt them.
Between 2007 and 2012, the SSA reported an average of $2.1 billion in annual overpayments to beneficiaries. This was a fraction of the total paid out each year, but it nevertheless exceeded the SSA's own target rate. In 2010, for instance, overpayments amounted to 0.39% of total distributions, or roughly double the agency's 0.20% goal.
One of the most common ways for an overpayment to happen is when a person files for Social Security retirement benefits before reaching full retirement age but nevertheless continues to work. In this situation, the worker is asked to estimate earnings for the upcoming year. If that figure comes in higher than $15,480, then the SSA will deduct $1 in benefits for every $2 in earnings above that threshold.
With this in mind, it's easy to see how an overpayment could innocently come about. Let's say, for example, that you file for benefits at age 62 and anticipate earning $15,000 during the year. In this case, no money would be withheld from your benefits. But if you go on to actually earn $20,000, you would have received $2,260 in overpayments from the SSA ($20,000 minus $15,480, divided by two).
The downside to an overpayment is that it must be paid back. And according to the SSA's website, you'll be asked to do so within 30 days. If you fail to comply, then the amount will be withheld from your future benefits in either lump sum amounts or as an agreed-upon percentage of your monthly check.
Here's how the SSA describes the options in its pamphlet on overpayments:
If you agree that you have been paid too much and that the overpayment amount is correct, you have options for repaying it.
If you are receiving Social Security benefits, we will withhold the full amount of your benefit each month unless you ask for a lesser withholding amount and we approve your request. Full withholding would start 30 days after we notify you of the overpayment.
The point here is simple: Even though receiving excess benefits may seem like a great thing at the time, it will eventually come back to haunt you in the form of smaller future benefits until the surplus has been recouped.
Remember: When it comes to Social Security, as with most areas of life, there's no such thing as a free lunch.