Retirees are bracing for potential cuts to their Social Security benefits as a new overpayment "clawback" policy takes effect later this month.
The Social Security Administration announced Friday that it will increase the default overpayment withholding rate for beneficiaries to 100%. That means that down the road, a beneficiary could see their entire monthly payment withheld if they received large enough overpayments. The announcement is a sharp reversal of a Biden-era policy that capped the overpayment recovery at 10% of a person's monthly benefit.
The new withholding rate will take effect on March 27,
"We have the significant responsibility to be good stewards of the trust funds for the American people," said Lee Dudek, acting commissioner of Social Security. "It is our duty to revise the overpayment repayment policy back to full withholding, as it was during the Obama administration and first Trump administration, to properly safeguard taxpayer funds."
The new policy is set to recover $7 billion in overpayments over the next decade, according to estimates from the Office of the Chief Actuary.
READ MORE:
Financial advisors say the shift could be "devastating" for retirees and individuals who rely on
"Losing an entire month's benefit can disrupt essential expenses like housing, health care and food," said Daniel Milks, co-founder and operations officer of Woodmark Wealth Management in Greenville, South Carolina. "For clients on fixed incomes, this could force difficult financial choices, such as delaying medications or struggling to cover bills."
"Improper payments" — which generally occur from inaccurate earnings reporting, administrative errors or changes in a person's eligibility — amounted to less than 1% of total Social Security benefits paid out from 2015 to 2022, according to a
Improper payments include instances where beneficiaries were underpaid, but the majority of improper payments were overpayments, the report said. Out of the roughly $8.6 trillion in benefits paid out from 2015 to 2022, approximately $71.8 billion were improper payments, the report found.
As the agency moves to recover those funds, advisors can start taking these five steps to help their clients on Social Security prepare for the shift.
Identify vulnerable clients
Before the policy change comes into effect later this month, advisors should reach out proactively to clients who are the most dependent on Social Security for income, said Patrick Huey, founder of Victory Independent Planning in Camas, Washington.
READ MORE:
"Many recipients remain unaware of overpayments until the SSA issues a formal notice asking for repayment — so this change introduces additional urgency," he said. Advisors can start talking to their most vulnerable clients now to review their payment history and any known Social Security Administration communications regarding overpayments.
Check notices and contact the SSA
Beneficiaries usually get a notice from the SSA if they've been overpaid, but advisors say these notices can be difficult to understand. Advisors can help clients figure out if they will be subject to withholding by reviewing past benefit statements, reading notices they've received through mail or their online Social Security accounts and by calling the Social Security Administration directly to ask about a beneficiary's account.
Social Security workers have warned that
"Put bluntly, the ramifications of downsizing SSA are enormous," an agency employee told
Request a lower withholding rate
For clients who anticipate large benefit withholdings moving forward, advisors can also help them by submitting a request for a lower withholding rate. By default, overpayment recovery rates will be set at 100% after March 27, but people who cannot afford full recovery of their overpayment can request a lower rate.
READ MORE:
Advisors who think a beneficiary has received an overpayment notice in error can also help the client submit an appeal to the SSA to try and avoid future withholdings.
Reevaluate other sources of income
Social Security benefits make up about one-third of the total income for Americans age 65 and older,
"Emergency funds and short-term cash reserves will be essential" for beneficiaries subject to large Social Security withholdings, Huey said.
Stay on top of future SSA changes
Along with much of the federal government, the Social Security Administration is undergoing sweeping changes under the current Trump administration. With more changes expected to come, advisors say it's crucial to stay up to date on the impacts of policy changes on retirees.
"I think more parties from both inside the administration and externally are looking to make sure the program runs as efficiently as possible," said Mike Lynch, managing director of applied insights at Hartford Funds in Wayne, Pennsylvania. "It may signal that the government is looking at this program closer than ever and is committing to making changes and correcting errors if needed. This is such a critical social program, and we want and need it to be here for future generations."
