The End of Social Security’s Interest-Free Loan

The end of Social Security’s payback option means there is less room for error when devising a strategy to maximize your Social Security benefits. The U.S. Social Security Administration (SSA) announced December 8 that, effective immediately, the ability to “pay back” Social Security benefits will be allowed only during the first 12 months following the first month of receiving benefits. In addition, the new ruling states that only one withdrawal or “payback” is allowed per lifetime, and the ability to withdraw benefits will be effective only after the month in which the request is made. Previously, retirees who paid back their Social Security benefits and refiled received higher payments based on delayed retirement credits. For example, if John’s full retirement benefit is $1,000, filing early at 62 would give him a reduced monthly benefit of $750. On the other hand, waiting until full retirement age would give him $1,000 and waiting until age 70 would give him $1,320 per month. Under the old rules, John could file at age 62, then pay back all benefits received and refile at age 70, which would increase his benefit to $1,320 per month.

The SSA stated its intentions to revise the withdrawal policy earlier this year after the program was portrayed as an “interest-free loan” from the government. The Center for Retirement Research at Boston College estimated the payback option cost the Social Security system somewhere between $5.5 billion and $8.7 billion.1

Going forward, you can take advantage of the payback option only if you began taking benefits less than one year ago. The loss of this option makes it more important that you have a tailored Social Security strategy from the beginning.

1 Alicia Munnell, Alex Golub-Sass and Nadia Karamcheva, Strange But True: Free Loan From Social Security. Center for Retirement Research at Boston College, March 2009.

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