For older Americans, Social Security promises guaranteed monthly income.
Except when you have certain kinds of unpaid debt.
While most creditors — i.e., credit-card companies or other lenders — can't touch your Social Security payments, some types of delinquent debt can reduce those monthly checks. And when they do, look out.
"If you're actively paying on the debt, there shouldn't be an issue," said certified financial planner Peggy Sherman, lead advisor at Briaud Financial Advisors in College Station, Texas. "It's when you default and the debt gets to be too delinquent that it becomes a problem."
As a group, older Americans' debt burden continues climbing. In the 60-to-69 age group, total consumer debt — i.e., mortgages, loans, credit cards — is nearly $2.2 trillion, compared with $380 billion in 1999, according to the latest data from the Federal Reserve Bank of New York. Among those age 70 and older, it's close to $1.2 trillion, up from $180 billion in 1999.
At the same time, people in their 60s are typically transitioning to retirement and going on Social Security — the most popular age to start those benefits is 62, according to the government.
About 48% of married couples, and 69% of singles age 65 and older, get at least half of their income from those monthly checks. Another 21% of married couples and 44% of unmarried individuals rely on them for 90% or more of their income. The average monthly benefit today is $1,461.
While delinquency rates remain relatively low (below 1.5%) across most types of consumer debt for people age 60 and older, those who are in danger of defaulting should know whether it could affect their Social Security income. Same goes for other types of financial obligations, like back taxes or unpaid child support.
"While the person might know that they owe debt, it might come as a surprise that it can reach their Social Security," Sherman said.
For delinquent federal income taxes, the Treasury Department can either levy up to 15% of your benefit until the debt is repaid, or, less frequently, garnish everything but living expenses until you've paid it off.
"That could last for however many months it takes for the tax to be repaid," Sherman said.
People who owe back taxes should reach out to the IRS instead of ignoring the debt. Depending on your situation, you could qualify for a payment plan to tackle it over time, or you might be able to negotiate a lower bill. In some cases of extreme economic hardship, you could have the debt erased altogether.
The Treasury Department also can garnish Social Security checks for debt that originated with other federal agencies, such as the Education Department — i.e., federal student loans.
In this situation, up to 15% also can be withheld, but that garnishment cannot reduce your monthly benefit below $750.
The share of consumers age 60 and older with outstanding student loan debt quadrupled from 2005 to 2015, to 2.8 million from about 700,000 people, according to a 2017 report from the Consumer Financial Protection Bureau. The share of all student loan borrowers who are age 60 and older went to 6.4% from 2.7% in that time, while the average amount owed grew to $23,500 from $12,100.
Moreover, the number of Social Security recipients 65 and older who had their check reduced due to defaulted student loans increased by more than 500% between 2002 and 2015, according to a report from the Government Accountability Office.
Joshua Cohen, a consumer rights attorney who focuses on student loan law, said he counts older Americans among his clients who are seeking help for loans they've taken out both for themselves and others such as children or grandchildren. Some already are dealing with garnishments from their Social Security checks, while others fear they are in danger of reaching that point.
"If you're not experiencing it yet, you should look at how to maneuver yourself into an income-driven plan," said Cohen, who is based in West Dover, Vermont. "If you're already getting the [reduction], you should research how to get out of default and into a plan."
Income-driven repayment plans cap your monthly bill at a percentage of your income. Sometimes, that could mean a payment as low as $0.
For any garnishment related to federal debt, you should receive notices that it's going to happen. However, Cohen said, those notices may end not getting opened, or get delivered to an old address, or, perhaps, misunderstood by the recipient. In the end, though, you're supposed to get at least a 30-day notice that the levy to your Social Security is going to start.
If you've fallen behind on child support or alimony (also known as spousal support), a judicial order could result in your Social Security benefits being garnished.
Exactly how much could be withheld depends on the state you live in. It could be up to federal limit, which is 50% of your benefits if you are supporting another spouse or child. If you're not in that situation, it's 60%. And if you're behind more than 12 weeks, up to 65% can be taken, Sherman said.
It's not an automatic event, though.
"The parent of the child would have to go to the court and seek payment," Sherman said. "Same thing for an ex-spouse and alimony."
Additionally, your payments could be reduced, by up to 25%, due to court-ordered restitution to a victim of a crime you were convicted of.
While debt collectors can't directly touch your Social Security benefits, they can get a court order to tap your bank accounts to recover the amount owed.
Generally speaking, banks and credit unions are required under federal law to ensure that any Social Security funds electronically deposited in the previous two months are protected from those court-ordered garnishments. However, if you transfer the money to a different account, or the money remains in your account for more than two months, it could be fair game for debt collectors.
"If you're hit with a garnishment order, you should seek legal counsel and be sure to respond to [the order] by asking that the Social Security funds are protected," said Lauren Saunders, associate director at the nonprofit National Consumer Law Center.