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?