Helen Gilbert retired in March 1994 and immediately applied for Social Security benefits. But after two years of letters, phone calls and personal visits, she still can't answer one compelling question: How much of a monthly benefit is she due?
Her monthly Social Security checks have been reduced, boosted, pared and pared again. She's received a passel of letters from the Social Security Administration that maintain that Gilbert owes the government money in Social Security "overpayments," despite the declines in her stipend. But she only recently learned--after contacting a reporter--that the two-year battle, the elusive "overpayments" and the dozens of dunning letters are nothing more than a mistake.
Any retiree who receives an extraordinary payment after applying for government retirement benefits should take note.
Payments for deferred compensation, lump-sum retirement benefits, vacation pay, sick leave and employee buyouts are frequently "misclassified" by the Social Security Administration, government officials acknowledge. That sends government computers into a letter-writing, benefit-recalculating frenzy, which can take months--or, as Gilbert can attest, even years--to correct. Those who don't understand the Byzantine rules that govern the nation's retirement system can find themselves out literally thousands of dollars.
Consider Gilbert's case. At age 64, she retired from her job as a secretary for the Los Angeles Unified School District. It was March 1994, the month of her birthday, and she immediately applied for Social Security benefits, informing government officials that she would earn less than $8,000 for the year.
Social Security officials determined that because her annual income would be low enough, she could actually claim retroactive benefits for the two months before she retired. They began to send her checks amounting to $787 a month.
All was well for several months. But then the school district decided to pay Gilbert about $30,000 in unused vacation and sick pay. Gilbert dutifully trotted down to the Social Security office with the appropriate form in hand and reported her newfound riches.
She was correctly informed that this money should be ignored for Social Security purposes. That's because it was earned in another year, says J. Robert Treanor, manager of the Social Security division at William M. Mercer in Louisville, Ky.
"These things can get complicated," Treanor says. "But while these wages count for payroll tax purposes, they don't count--at least not in the year they're paid--for purposes of the retirement test."
Payroll taxes, which support the Social Security and Medicare systems, are often taken out of these payments in the year in which they're paid. But when calculating whether your income is too high to qualify for retirement benefits and how much you earned to determine your benefits, the payments are excluded. That's because the money is considered earned in another year.
Unfortunately, government computers don't know that.
A few months later, Internal Revenue Service "tapes"--which report income of all taxpayers--were fed into the Social Security system's computers. Gilbert's income was recorded at $38,000--the $8,000 she earned in January and February, plus the $30,000 extraordinary payment. Although the computer didn't know to exclude the extraordinary payment, it did know that if you earn more than certain threshold amounts--$11,520 in 1994 ($13,500 in 1997)--your Social Security payments are reduced by $1 for every $3 in earnings above the threshold. That wiped out Gilbert's eligibility for 1994 benefits.
So, a year and half into retirement, Gilbert got a computerized letter saying she wasn't eligible to claim retirement benefits in 1994 and that because she had received monthly checks throughout 1994, she owed the government $9,466. On the bright side, the computer also recalculated her retirement benefits for 1995. With an extra year of earnings, she would be due about $100 a month more.
Gilbert knew the computer was wrong. After arguing with a number of government officials, who maintained that Social Security machinery never erred, she was able to stop the collection process, which had begun to gobble up her retirement checks in an effort to recoup the erroneous "overpayment."
In the meantime, the computer continued to spew out enriched monthly benefits, blithely ignoring the fact that Gilbert had, indeed, retired in 1994, not 1995. When the agency caught up to that error, Gilbert was dunned again.
What's most distressing about Gilbert's case is that she did everything right. When retirees get extraordinary payments, they're supposed to let the Social Security Administration know right away, so government officials can tell the computer not to do what it did to her. She did, but somehow the message never made it into the computer.
When that failed, the next step was to try again. Gilbert did. And while she was able to stop the attempts to collect the $9,466, many other things continued to go wrong.
At this point, neither Gilbert nor the Social Security Administration can say for sure whether Gilbert has been paid too much or too little. That will take another bout with the computer.
Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or message Kathy.Kristof@latimes.com on the Internet.