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.

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 (opens in new tab)).

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.

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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.

Mary Beth Franklin
Senior Editor, Kiplinger's Personal Finance