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Retirees' Gift on the Ceiling

By Jane Bryant Quinn
Sunday, May 5 1996; Page H02

Congress has passed, and the president signed, a birthday present for people who reach 65. You're supposed to remember how nice they were when you reach the voting booth.

Your gift: an increase in Social Security's "earnings test." That's the test that determines whether you've actually retired. If you earn more than a fixed amount, your Social Security check is docked. High earners under 70 get no benefits at all.

The new law raises the amount you can earn without facing a cut in benefits. Starting this year, 65- to 69-year-olds can earn $12,500 free and clear (only earnings count, not pensions, dividends and interest). That's up from $11,520 before the law was passed. For every $3 above the earnings ceiling, you lose $1 in Social Security benefits.

The "free earnings" ceiling gradually rises until the year 2000, leaps to $30,000 by 2002 and is indexed thereafter to wage inflation. That amount is so high, given the earnings of most semi-retirees, that hardly anyone's benefits will be docked. The estimated cost between now and 2002: $5.6 billion, says Social Security spokesman Phil Gambino.

About 1 million Social Security recipients now lose some benefits after applying the earnings test. These new rules are retroactive to Jan. 1, so some semi-retirees already are due more benefits for 1996.

Social Security's computers should be reprogrammed by mid-May, Gambino says. If you're among the 1 million whose benefits are reduced, you'll get a notice in June, explaining the changes and how they will affect your check. If you're owed extra benefits already, you'll get them in June -- and they'll come automatically. You don't have to telephone or fill in an application.

There's no change in the earnings test for retirees 62 to 64. You can still earn as much as $8,280 free and clear this year; for every additional $2 in your paycheck, your Social Security check declines by $1.

There's also no change for people 70 and up. You get your full benefit, no matter how big your paycheck is.

Between now and 2002, the cost of paying more money to working 65- to 69-year-olds is supposed to be offset by spending cuts. Among the cuts: refusing Social Security disability payments to alcoholics and drug addicts; taking a sharper look at others who seek, or currently receive, disability pay, to see if they really qualify (presumably, some will be cut off); and denying children's benefits to your stepchild, if you die or become disabled, unless you provided more than half of the child's support.

These theoretical savings may or may not materialize.

After 2002, when the earnings test rises past $30,000, this change starts to cost the government money -- an estimated $2.6 billion by 2005.

Around 2010, however, when the baby boomers start to retire, the new earnings test might pay for itself, Gambino said. Here's why:

Currently, you're rewarded for postponing your retirement. For every year after 65 that you put off claiming benefits, your Social Security check increases by 5 percent. Between now and 2010, that bonus gradually rises to 8 percent. The rise was designed to save Social Security some money. Egged on by the bonus, you might not put in for benefits until a later age -- maybe 68 or 69.

Now comes a new law that suddenly encourages earlier retirement. By 2002, you can retire at your full retirement age, get your full benefit and still earn a decent paycheck. There's no incentive to wait.

By 2010, one will offset the other, Gambino said. If you "retire" at the full retirement age (which then will be 66), yet continue a moderate level of work, you'll get higher Social Security benefits than you'd qualify for today. But because you didn't delay retirement until 68 or 69, you won't be getting that extra 8 percent a year. "So we're paying extra now in lieu of paying extra later," Gambino said. "The government breaks even."

Maybe yes, maybe no. Either way, however, the elderly will be getting more.

More than a quarter of all government spending already goes for Social Security, Medicare and the nursing home portion of Medicaid, and that percentage will increase. Proportionately, that leaves less and less for children, students, working people and the poor.

In 1960s and early 1970s, when many of the elderly were poor, working people decided to tax themselves, for higher Social Security payments and to establish Medicare. Now the worm has turned. The elderly are doing well, while poverty is on the rise among children and ill-paid working families. What will the elderly do -- if anything -- to repay what they've received?

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