Social Security May Soon Put Lid on Benefits 'Do-Over' Strategy

Last Updated: 9/17/2010 4:15:07 PM

The Social Security Administration may soon eliminate a loophole that allows Social Security recipients to claim benefits early and then apply for them again years later when they are eligible for larger checks.

Although you can collect Social Security benefits starting at age 62, if you do, your benefits will be significantly lower than if you wait until your full retirement age or even later. About half of Americans file at 62, but “in most cases its a costly mistake,” says retirement journalist Mark Miller.

As ElderLawAnswers explained in a 2008 article, a little-known provision of Social Security law allows beneficiaries to have their cake and eat it, too — to apply for benefits when they first become eligible and later withdraw their application for early benefits and reapply and receive full retirement benefits. The catch is that they must be able to pay Social Security back all the money they have pocketed so far. But no interest is due on the benefits received, so the money is in effect an interest-free loan. In addition, those who repay benefits can claim either a tax credit or a tax deduction — whichever gives them a bigger tax break — for any income taxes they may have paid on the benefits.

Economist Larry Kotlikoff estimates that taking advantage of the “do-over” scheme could increase a retiree’s living standard by as much as 15 percent. If the retiree lives a long time, the extra monthly benefits can really add up.

Once unknown, the strategy has become more widely used, which is why Social Security Administration may soon curtail it. Kiplinger reports that in 2007, only about 500 people took advantage of the payback option. By 2009, that number had nearly doubled.

The Social Security Administration is now proposing a rule that would allow retirees to withdraw their Social Security application only once and only within 12 months of first receiving benefits. The proposal, which must be approved by the Office of Management and Budget, could take effect within a matter of months.

In the meantime, Miller quotes economist Kotlikoff as suggesting that anyone now receiving benefits and interested in pursuing a do-over should get started immediately.

“Anyone age 65 to 75 who has taken benefits early at 62 should think about doing this today if they have the money [to make the repayments],” Kotlikoff says. “Social Security probably will grandfather in anyone who has already applied, even if they do change the rules. But banking the money and hoping to repay it later is no longer a good strategy.”