Making Your Money Last
Social Security Payback Option May Disappear
A proposed rule would eliminate the chance to hike benefits via the "do-over" strategy. It's not for everybody. But consider your options now.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
August 24, 2010
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A little-known strategy that allows Social Security recipients to boost their income by repaying benefits received in earlier years and then claiming a bigger monthly check based on their older age may soon disappear. Kiplinger's has learned that the Social Security Administration is moving to eliminate the so-called do-over strategy. If the agency gets its way, the new rule could take effect within a few months.
The payback strategy has been gaining attention in recent years, thanks in part to a series of articles by Kiplinger's that unveiled several ways of making the most of your Social Security benefits (see Secrets to Maximizing Social Security).
If you or someone you know might benefit from the payback strategy, now's the time to consider it and come to a decision. Putting it off could mean letting the government make the decision for you -- by eliminating the opportunity.
Retirees can collect Social Security benefits as early as age 62, but monthly payments are reduced by 25% compared with what they would be if claimed at normal retirement age, which is 66 for those who claim benefits this year. Those who are willing to wait past age 66 can boost their benefits by 8% for every year they delay, up to age 70, increasing annual benefits to 132% of their base amount.
Maybe you decided to collect early just because you could, but now you regret your decision and wish you had held out for a bigger monthly check. In order to get one, you must first file SSA Form 521 ("Request for Withdrawal of Application") at your local Social Security office.
Your retirement benefits will stop almost immediately, and if your spouse receives benefits based on your work record, his or her benefits will stop, too. Then the SSA will send you a letter telling you how much you need to repay (including any spousal benefits). That process may take several weeks or even months. Once you repay the benefits -- which can top $100,000 -- you can reapply for a higher payment based on your current age, locking in a larger base amount for future cost-of-living adjustments and maximizing lifetime benefits for a surviving spouse.
In 2007, only about 500 people -- out of more than 37 million retirees and their dependents receiving benefits -- took advantage of the payback option. By 2009, the number had nearly doubled as more retirees learned how they could repay their benefits, interest- and penalty-free, and restart them at a new, higher level. As a bonus, those who repay benefits can claim a tax credit or a tax deduction -- whichever results in a bigger tax break -- for any income taxes paid on the benefits as they received them.
The strategy has gained popularity as retirees realized that it is cheaper to repay Uncle Sam and lock in inflation-adjusted payments for life than it is to buy a similar amount of guaranteed income in the form of an annuity from an insurance company. But that attention was apparently unwanted and has led the Social Security Administration to rethink its policy.
Under the newly proposed rule, retirees would be allowed to withdraw their application for Social Security benefits only once during their lifetime and only within 12 months of when they began receiving benefits. If they changed their mind within the first year, they could stop their benefits, pay back what they had already received and restart them later at a higher level based on their age at that time. But once that 12-month deadline passed, they would no longer be able to repay benefits to "buy" a higher benefit later. The federal government's Office of Management and Budget has the final say.
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Reader Comments (33)
Posted by: Bob at 08/24/2010 05:14:46 PM
I sent this comment before in response to an earlier article on this subject. The old saying "A bird in the hand is worth two in the bush." is as true now as it ever was. I see one big problem with the retirement do-over. What if you pay back all the money up to that point and then die shortly there after. The money you paid back will then not go to your heirs and you will have only received the higher SS rate for a very short time. It would make far more sense to keep the money and invest it. If the amount was around $100,000 safely invested at a rate of 4%, that would be $333 a month in extra income to add to the lower social security check and you would still have the $100,000 to pass on to your family regardless of how much longer you live. The do-over looks like a losing strategy to me unless you live a really, really long time. Most of us won't.
Posted by: MARTHA at 08/24/2010 07:59:19 PM
No one answer fits all. For some people it may make sense and others it won't. In our case we paid back $120,000 at age 70 and drew an additional $12,000 per year Social Security. The bonus for us is that where we were paying $5,000- !0,000 in taxes each year we now will pay little to no taxes in the future. In addition we did a Roth conversion of $100,000 and were able to take a $85,000 itemized Social Security repayment deduction on our Federal taxes to offset most of the taxes on that Roth conversion. For us it seemed like a slam dunk benefit, and we have future cost-of-living protection. We just need to live another 5 or 6 years to break even. No guarantees in life though.
Posted by: Cliff at 08/24/2010 09:42:43 PM
I agree with Bob 100 percent. You are better off to start taking benefits at 62 unless you are able to get a guarantee from the man upstairs of exactly how long you are going to be around.
Posted by: Nisiprius at 08/24/2010 10:44:07 PM
It's not surprising. The writing has been on the wall since September 2008, when the SSA Inspector General wrote a report saying: "The openness of these procedures allows a loophole for those SSA beneficiaries who would like to increase the amount of their reduced benefits. Moreover, it permits SSA beneficiaries use of Federal funds at a zero percent interest rate while denying the OASI Trust Fund the opportunity to earn interest on those same funds. For these reasons, SSA may want to modify the criteria for withdrawing Title II benefit applications and limit its use. For example, withdrawals could be limited to cases where (1) work activity has significantly reduced the amounts received by the beneficiary and (2) the beneficiary has yet to reach FRA." It's a loophole, not an intentional feature of the system, and the "interest-free loan" aspect makes it particularly loopy. Meanwhile, the obvious should be noted: If, say, at age 62, you think you will have enough money to repay Social Security say, four years later, instead of claiming now and repaying four years later, you can, instead, wait four years to claim Social Security and use that "payback" money to meet your expenses in the meantime. It comes out to at least roughly the same thing, without the complexity or the bureaucracy--although you miss out on the "interest-free loan" aspect.
Posted by: drive-by journalist at 08/25/2010 07:41:20 AM
A little off-point here but why doesn't Social Security offer to buy out the entitlements of the wealthy at a nominal price? I believe wealthy folks typically get much higher than average returns so they'd be better off in the long term investing that nominal sum. Many would decline the opportunity, of course, but even if a small percentage participated the Social Security program would be more stable.
Posted by: Ed McGahan at 08/25/2010 12:18:46 PM
How much money does the government allow me to make if I take retirement at 62?
Posted by: dusko at 08/25/2010 03:36:49 PM
That's an interesting comment by Bob. If our kids are anything like us, frugal and hard working, they don't need our money. They will do just fine. Rather than thinking about leaving an estate perhaps we should consider enjoying the fruits of our labor and let the check to the undertaker bounce (nearly). Keep the $100 and spend it. The economy will thank you.
Posted by: nisiprius at 08/25/2010 07:40:02 PM
By the way... could someone confirm that such a rule HAS actually been proposed, and give a link to an authoritative source--a government website describing the proposal or something of the sort?
Posted by: P Randle at 08/26/2010 03:28:12 PM
With all the talk about how bad the Social Security Trust Fund is in financial trouble; no one has discussed a true solution to fix it. It is a trust fund, not a checking account. The money in "this fund" is not nor has it ever meant to be used for any purpose except by the individuals who contributed to it from their wages. There has been no mention that the government violated this by "borrowing" from it. There has been no mention as to how the government would repay their borrowing from a trust fund that they had no legal right to do. I propose: (1) Taking the interest that was supposed to have accumulated from the bank bailouts and use this money to start repaying the trust fund. (2) To stop paying political figures (Senators and Congressman) full retirement benefits after they serve one term in office; whereas a retiree has to work until they are at least 62 years old to collect what is legally theirs by law. (3) Let individuals invest the money taking out of their wages the way they want. There are many ways an individual can invest and save for their own retirement other than Social Security benefits. This would stop the "raiding" of the trust fund and give an individual more say and control over their own money. As a government employee, I worked 20 years outside the government system; so I have all the requirements for Social Security. But I would love to take even half of the money I have accumulated and invest it. I know that this would increase my benefits; so that by the time I was ready to retire, I would not have to depend solely on Social Security benefits. ...
Posted by: Mary Beth Franklin at 08/27/2010 09:09:05 AM
Hi. I'm the author of this story. Thanks for all your comments. As Bob notes, this strategy is not right for everyone. In fact, I think it's only appropriate for a small group: those who took SS benefits early, are now 70 years year old, and have a chunk of available cash to repay the benefits, which could amount to $100,000 or more as in Martha's case. The advantage is guaranteed income for life for the worker and surviving spouse with a larger based benefit amount on which future cost-of-living adjustments would be based. It's essentially a cost-of-living adjusted immediate annuity at about a 40% discount compared to one from an insurance company. (And yes, you have to live long enough to recoup your investment, which could take 8 years or more. One hedge is to buy a term life insurance policy for the amount you invested to cover your break-even period). In response to Nisiprisus's question: The Social Security Administration sent its the proposed rule to the Office of Management and Budget in June. The next step is up to OMB which could approve, reject or modify the proposal. Hope this helps.
Posted by: Sonja W. at 08/27/2010 12:35:26 PM
The US Government has borrowed so much from SS, I would not be surprised if they would try and starve us to death when we are old. They never paid back the money, yet they take it out of my check every payday. This government has fleeced us for years, SS would not exist if the government could help it,and they would still take the money out of my check if they could. The greedy politicians need to be ashamed of themselves, what they have done to this country can't be listed in one short e-mail.
Posted by: Ron at 08/27/2010 03:07:01 PM
Martha, I have been wondering if this makes sense for me. I took SS at 66, get maximum benefit, but I'm still working and making more than $100k per year. Each year I work knocks off a much lower earning year of 30+ years ago. Does any of this matter if I'm already maxing out my SS?
Posted by: NJMC_CFP at 08/28/2010 08:41:54 PM
We always knew this would come as it has been too good to stay true. Each case is different but the average payback is about 8.5 years from a 9% cash on cash return, plus a 3% average COLA for a total 12% return. The reciprocal will give you 8.5 years to get your money back. Things to watch for: 1, you can and perhaps should do it before you reach 70 to make sure your maximum family benefit is not exceeded. My restart was at 69 years and 3 months and any time later would have reduced my spouses benefit as we were at family max benefit then. 2. SSA never gave us a letter with a payback amount (almost 4 months after filing, so I had to go the local office, calculate it with them there and present checks for receipt before the end of the year to be able to get the income tax payback to offset the cost. 3. My first benefit deposit was not paid until March, 7 months after starting and that was with "congressional" help. 4. You will have to pay your Medicare quarterly in advance while you wait and then wait for a refund of your overpayments. But the final result is worth it since the joint COLA'd payout reduces so many retiree risks: longevity risk obviously with the age 69 IRS joint life expectancy of 27 years; return risk with a 8-9% cash on cash return beats any comparable investment or payout annuity available in the market; reinvestment risk beats short or intermediate T-bonds or CD's by a mile; inflation risk as it is COLA'd.; sequence of return risk as it's extra cash flow allows you to maintain and not sell diversified stock funds when the market is down. The trade-off not getting your cash back because you possibly die too early pales in comparison, unless you are already sick. Plus, once you are dead, what difference does it make to you and your heirs will get your other assets instead which you haven't had to spend down.
Posted by: Theresa at 08/29/2010 05:30:41 AM
Mary Beth, is it likely that if this proposed restriction of the payback option becomes a new rule that those that have taken early retirement option will be "grandfathered" under this new rule? For example someone who has already taken more than one year of early retirement benefit should not be left with no hope (or option) to repay and apply for benefit again at full retirement age. I think these people too should have a twelve month window like the new applicants to reconsider their option.
Posted by: NMCC_CFP at 08/29/2010 11:58:26 AM
For Ron: Yes, your replacement of lower earnings years with later years of higher earnings will increase your AIME (average indexed monthly earnings) which, in turn, will increase your PIA (Personal investment account) and hence your monthly SS payment, regardless of whether you do a "do over" or not or just postpone benefits. The highest 35 years of indexed earnings count for the benefit. The SSA website has a detailed program you can use to calculate your exact benefits earned. If your spouse is collecting on your benefits, be sure to figure the total benefits to be gained from your earnings record as that maximum level can reduce your spouse's benefit as yours increases.
Posted by: Bill at 08/29/2010 04:07:37 PM
the gov. says the prob. with the loss of mony in the SS. is due to the baby boomers retiring,,,has anybody other then me stopped by the SS. off. lately?...drug addicts,,,how do they get disabilty without the 10 year/point requirement,,,or how does the young moms come in with their boyfriend and a hand full of kids get SS? benifits,or worst yet, how can those ( young )coming across the border without paying a single penny into the system receive SS...I was at the SS. off/ the other day with my 95 yr. old father-n-law and the above is what i saw...out of the 100 or so people that was there,i saw about a dozen older people WHO EARNED IT signing up.
Posted by: Lee at 08/30/2010 11:46:46 AM
Ms. Franklin, Thanks for the additional info. The wife is 6 years older, turns 66 in 18 months and we were planning to do payback as part of our long term investment strategy. The increased benefit amounts to an 8.1% cola return on the payback amount. If OMB got the proposal in June 2010, any guess as to effective date from today if SSA gets approval? Do you think there would be a grandfathering of current beneficiaries under 66? Any additional info would be helpful since we could act earlier after 12/31/10 to at least receive some benefit under the current rules. With only 1000 takers in 2009, it wouldn't seem that this would be high on the radar. Many thanks for your assistance!
Posted by: Robert G. at 08/30/2010 04:34:14 PM
Dear Mary Beth, I am 14 months past my 70th birthday, and looking to "Repay and Reapply." I took retirement benefits at 62, and have collected,$104,502, between July 1,2001, and June 30, 2009, the month of my 70th birthday. Since June of 2009, I have received payments totaling, $17,624. Must I repay these funds ($17,624), as well as the $104,502? How will these 14 months since turning age 70, be treated? Thank you, Robert
Posted by: Greg W at 08/30/2010 05:37:14 PM
To the author, Mary Beth Franklin: Please direct us to where we can see the "proposed rule." I called SSA, showed them your article, and they said that it would require an amendment to the SSA laws by Congress to pass this. They could not direct me to any "proposed rule." If it can be done simply by a rules change, there usually is a time period for people to comment on the proposed change. Please direct us to some web sites which give the source of your information, and especially how we can comment to the OMG or to SSA on this proposed rule...
Posted by: Robert G. at 08/30/2010 11:04:51 PM
Dear Mary Beth, Can you tell me what happens to a person in my position? I am 71yrs and 2 months old. If I repay benefits from the past and reapply for benfits do I repay every cent received todate or only the benefits received from 62 to 70? If only the benefits from 62 to 70, are recaptured is there any adjustment to benefits (14 months) to my current age?Thank you for your continuing answers to these questions.
Posted by: tom at 08/31/2010 09:32:54 AM
Hey Bill, not everyone's disability, legal residency, and economic situation are easily identifiable by casual visual inspection.
Posted by: Mary Beth Franklin at 08/31/2010 02:50:22 PM
Robert and Theresa, I've sent your question about the payback amount and whether retirees who have already claimed early benefits would be grandfathered under existing procedures. I'll let you know when I get an answer. I can't post links in this forum, but here's the text of the proposed rule that SSA sent to OMB. OMB could approve, deny or modify it or suggest that it be put out for public comment. There's been no action yet. -------------------------------------------------------------------------------- SSA RIN: 0960-AH07 Publication ID: Spring 2010 Title: Amendments Regarding Withdrawals of Applications and Voluntary Suspension of Benefits (3573P) Abstract: We propose to modify our regulations to establish a 12-month time limit for the withdrawal of an old age benefits application. We also propose to permit only one withdrawal per lifetime. These proposed changes would limit the voluntary suspension of benefits only to those benefits disbursed in future months. Agency: Social Security Administration(SSA) Priority: Substantive, Nonsignificant RIN Status: Previously published in the Unified Agenda Agenda Stage of Rulemaking: Proposed Rule Stage Major: Undetermined Unfunded Mandates: No CFR Citation: 20 CFR 404.313; 20 CFR 404.640 Legal Authority: 42 USC 402; 42 USC 402(i); 42 USC 402(j); 42 USC 402(o); 42 USC 402(p); 42 USC 402(r); 42 USC 403(a); 42 USC 403(b); 42 USC 405(a); 42 USC 416; 42 USC 416(i)(2); 42 USC 423; 42 USC 423(b); 42 USC 425; 42 USC 428(a) to 428(e); 42 USC 902(a)(5) Legal Deadline: None Timetable: Action Date FR Cite NPRM 06/00/2010
Posted by: Mary Beth Franklin at 08/31/2010 03:53:39 PM
Robert, hi, Mary Beth Franklin again. I checked with SSA and was told you would have to repay the entire amount--not just the benefits you received between ages 62 and 70. As the delayed retirement credits end at age 70, you would effectively be paying back nearly 10 years of benefits only to restart them based on their value at age 70, not your current age. My contact at SSA says it probably would not be worth it. Hope this helps.
Posted by: Mary Beth Franklin at 08/31/2010 03:56:49 PM
Theresa, hi, Mary Beth again. SSA says there is no provision to grandfather existing retirees under the proposed regulation. Because the proposal would change agency procedures, rather than any part of the Social Security Act, it does not requrie congressional action. The next step is up to OMB to approve, deny or modify the SSA proposal. Although OMB has 90 days to review it, there is no legal deadline for action which could come in the form of a proposed regulation subject to public comments or a final regulation with an immediate effective date. There has been no action yet. Hope this helps.
Posted by: kms at 09/02/2010 02:52:03 PM
I began receiving social security at age 62, If I am understanding the comments correctly I would have to pay pack to my present age {which is 73} My question is If I pay pack the 11 years would social security pay me increased benefits back to age 70 or just back to age 73?
Posted by: Mary Beth Franklin at 09/03/2010 08:28:27 AM
To KMS, hi, Mary Beth Franklin here, author of this article. At your current age of 73, it wouldn't make sense for you to repay your accumulated SS benefits which you started collecting at 62. You would have to repay all 11 years' worth of benefits. But since the maximum delayed retirement credit ends at age 70,you would be restarting your benefits based on age 70 rather than 73. Hope this helps.
Posted by: Steph at 09/06/2010 01:40:31 PM
As pointed out already, if only 1000 takers in 2009, hardly worth the rule change. The SSN must be anticipating a much larger number of boomers planning to do this as they reach 62 and pay back in later years. Maybe the government should tack on a small interest rate that would be a win- win?
Posted by: Dan at 09/11/2010 07:57:14 PM
All - - Here is a link to study on the W/D of application by the Solicitor General in Sept, 2008 located on SSA site - - "Quick Response Evaluation: Individuals Withdrawing Title II Benefit Applications (A-05-08-28110)" - (30 pages) www.ssa.gov/oig/ADOBEPDF/A-05-08-28110.pdf (type this into your URL or Search thru ssa website) To summarize - - Regulations allow this option at this time. Their main concerns were that many SSA employees need to be trained on this option (still the case), and that this is a free loan of money for those who select the option. In any case, I would think the government would always be happy to receive more $$ now into the Treasury if people do this and then gamble on their longevity. Dan P.S. I teach classes on Social Security for baby boomers. Unfortunately, many are considering this strategy and some already started benefits at 62 and are over 63, leaving them with perhaps no options to reconsider later?
Posted by: Steve at 09/17/2010 08:15:17 PM
Mary Beth, You've advised a couple of people in these comments not to initiate a social security "do over" if they are already past 70 because retirement benefit levels don't increase after one's 70th birthday--"It's not worth it." I think that is way too quick an answer. A "do over" could still make a lot of sense for someone not too far past 70, say 71 or 72. The real question is what benefits such a person would receive for the period from his/her 70th birthday and the restart date of his/her new higher benefits--would benefits for this interim period be paid at the old lower rate (age 62 rate), a the new higher rate (age 70 rate), or not at all (or, as some of the blogs on this subject say, for six months at the new higher rate but nothing at all above six months)??? If you know the answer to this question, lots of us would be grateful.
Posted by: dkfjdldj at 09/22/2010 12:06:39 PM
Boy, I wish I can get SS now. Too bad I'm only 35 yrs old...damn.
Posted by: kids36 at 09/22/2010 12:09:15 PM
I guess I won't be getting much out of SS in 20 yrs from now. What's the point of working hard anyway?
Posted by: Jenny at 09/22/2010 12:14:22 PM
Does anyone know that if you have low SS, you can apply for welfare and other supplement income and low income housing as well?
Posted by: Frank H. at 09/23/2010 08:40:16 PM
Mary Beth & et. al. What is the exact status of this ( SSA RIN: 0960-AH07 Publication ID: Spring 2010) now, as of 9/23/2010. Can the SSA act on this alone internally . . . by committee? vote ? It seems given the financial markets (ie. low/non yield of shorter term CDs, etc . . .), that this re-do will be increasingly popular in the quest for income. I would like to find some way to find out near real-time status on this. Thanks...