Can You Really Take a Social Security Benefit, Pay It Back, and Then Get A Bigger Benefit?

An idea that seems to have gained a lot of attention through an article by financial journalist Scott Burns is worth examining. Basically, the idea is this: you retire at 62 and apply for Social Security benefits, which are reduced because you’re retiring early. Then, at age 70, you withdraw from Social Security, pay back the benefits you’ve received, and reapply. Now you receive a much bigger Social Security check.

Normally, if you start taking Social Security benefits at a certain age, your benefit level is locked in from that point forward, although you get cost-of-living adjustments.  You forfeit the possibility of a higher future check if you start taking benefits earlier, and conversely, there are bonus benefits paid if you wait past your normal retirement age to start your benefits.  Consequently, a lot of effort goes into trying to calculate whether a retiree should take SS benefits now or later.  With this idea, having started benefits at 62, when you pay all your benefits back, you’re permitted to withdraw your earlier benefit application and reapply as if nothing had happened before.  The article is mostly targeted to people who took early benefits years ago, but I don’t doubt that the idea is also being considered by people who’ve not yet retired.

Remarkably, this scheme is permitted by the Social Security Administration.  You repay all the benefits you received, and without interest.  Then you reapply.  Now, why would you go to all this trouble?  Effectively, by paying back your “age 62”-level benefits, you’re buying a return in the form of a new, and much higher, benefit at age 70.  It’s like buying a life annuity guaranteed by the government.  As Michael Kitces points out, Burns’ math is somewhat off because he ignores inflation effects, but the basic idea is still potentially attractive.  As Kitces further notes, this strategy might or might not remain attractive once the impact of taxes is factored in.

This might be a good plan for those who retired at 62, are approaching 70, and who have enough cash lying around to pay back their original benefits; they can eat their cake and have it, too.  Of course, a lot of people aren’t going to be able to do this because they don’t have capital lying around that they can use to pay back eight years of benefits.  If they do have this option, there are some possible drawbacks:  (1) executing this is like buying a life annuity; if you die right after reapplying, you pay your money but get no benefit; (2) if you die at 69 without fully pulling off this strategy and you have a surviving spouse counting on widow’s or widower’s benefits, he or she is stuck with a lower benefit – for life.

That said, this approach strikes me as pretty risky for someone who is 62 today and who wants to execute it as part of an overall retirement strategy.  Why?  Because this scheme is obviously not what people are supposed to do with Social Security; it’s a loophole.  Congress often closes loopholes once they’ve come to light, and it could easily close this one.  No one who elects to start Social Security early today can be sure that the rules will not be changed tomorrow.  They could be stuck with a lower benefit for the rest of their lives, and if their surviving spouse’s benefit is based on their benefit, the spouse would get smaller checks too.

[By the way, there is a neat tool over at the MetLife site that allows a person to estimate lifetime Social Security benefits received when starting benefits at different ages; it also shows life expectancy information.  It’s a bit glitzy and is obviously intended to motivate you to contact MetLife, but it’s potentially useful.  It may not provide all the information you need to make a decision because it can’t include your specific tax situation.]

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Thomas Fisher, CFP®

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