Did You Sign Up for Social Security Too Soon?
The first baby boomers, born in 1946, can claim Social Security benefits this year, and almost a third of them plan to do so, according to a MetLife Mature Market Institute survey. But filing at age 62 pays out a reduced benefit, compared with holding out until what the Social Security Administration deems their full retirement age—in this case, 66. (Boomers born after 1946 can find their full retirement age here.) Waiting until age 70 produces an even bigger monthly check.
But if you've already signed up and received reduced payments, all hope is not lost—provided you haven't spent all the cash yet. A recent paper by Laurence Kotlikoff, professor of economics at Boston University and a codeveloper of the retirement planning software ESPlanner (Economic Security Planner), explains that you can repay the Social Security dollars you have already received and then reapply for monthly payments that are higher because of your advanced age.
"Social Security Form 521 (Request for Withdrawal of Application) permits you to a) repay the Social Security retirement and other family benefits received on your earnings record with no interest required and no adjustment for inflation and b) reapply for benefits from scratch. Better still, you can deduct the repayment on your income taxes or take a tax credit for the taxes you paid in the past on the Social Security benefits you received in the past," according to Kotlikoff.
It seems like a good deal if you're in good health, expect to live a long time, and have the cash on hand to pay the benefits back. But considering that Social Security was the largest source of income for those 65 and older in 2006, typically accounting for 40 percent of their income, according to the Employee Benefit Research Institute, I'm betting that most retirees don't have the money to pay it. The moral implications are another matter. Should affluent Social Security recipients be able to use this strategy when others can't?
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Unsure of When to Take Social Security Benefits?
To help simplify the decision-making process and help you maximize your Social Security benefit and income in retirement, you can try out MetLife's Social Security Decision Tool (www.metlife.com/SocialSecurity). In just three simple steps, the Social Security Decision Tool will calculate the optimal age for you to begin taking Social Security benefits. You may also want to consider consulting with a financial advisor before making any important retirement income decisions.
Did You Sign Up for Social Security Too Soon?
It seems to me there are two ways to look at this:
First, you're essentially getting an interest free loan from Social Security. If you invested you Social Security benefits from ages 62-67 to earn interest but had to repay them without any adjustment for interest, then the extra money is yours. A typical retiree gets around $1,000 per month; from age 62-66 this total around $64,000 in nominal terms (including annual COLAs). If you invested this amount at 3% above inflation, your total at age 67 would be around $68,000, so effectively you would have made $4,000 on the transaction. This isn't a huge amount of money, but it's effectively free money. That said, this aspect of the Social Security law was most likely unintentional. So if a lot of people did it Congress would likely require that beneficiaries repay with interest, in which case it's no longer a good deal.
Second, and probably more importantly, this provision gives people the chance to "buy" more of the Social Security annuity, which can be quite valuable because it's adjusted to inflation and offered on better terms than private annuities. Let's say you claimed at 62 and at age 67 you had both a Social Security benefit and some additional savings (IRA, 401(k), etc). By 'repaying' your benefits from 62 through 66 you'd effectively be buying a higher Social Security payment. The cost would be a lot less than if you took that money from your IRA or 401(k) and went to an insurance company to buy an annuity with a similar annual payment. Annuities provide a lot of protection against outliving your assets and so can be valuable even to people who don't expect to live a long time. (Unless you KNOW you'll die at a given age there's still a lot of uncertainty, and annuities protect against that.) This second aspect of the issue may be the more important one, since it's probably a good deal even if the rules were changed to require repayment with interest.
Andrew Biggs
http://andrewgbiggs.blogspot.com/
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