One of the most stressful decisions any retiree makes is the choice of when to begin taking Social Security benefits. Nearly every American can choose to start Social Security benefits between ages 62 and 70. Because the Social Security payments are reduced for an early retirement (before normal retirement age), an individual living to his exact life expectancy receives the same amount of money regardless of his chosen retirement age.
Social Security Payback Option
Although not commonly known or used, the Social Security administration allows retirees to change their minds about the age at which they begin to take benefits. For example, someone who begins to collect benefits at age 62 may decide, at age 70, to reverse his previous decision. To do so, he must simply pay back the sum total of all the Social Security benefits paid to him so far and, of course, fill out some forms. From that point forward, he’ll receive the much bigger benefit based on his new starting age of 70.
Social Security’s Interest-Free Loan
When paying back the money, in this case at age 70, the individual does not have to pay back interest – just the total of the benefits received. Any interest previously earned as a result of taking the early retirement benefit is his to keep. Therefore, the strategy of taking Social Security early and then repaying this “loan” is always superior to, financially speaking, simply delaying the receipt of initial benefits to age 70.
Will the Social Security Loan Opportunity Go Away?
Needless to say, this little-known opportunity is very costly to the government. One estimate by the Center for Retirement Research estimates that folks using this interest-free loan strategy could cost Social Security between $5.5 billion and $11.0 billion. That the loan opportunity appears to be an unintended consequence rather than a specific government intention, combined with the numerous projections for Social Security shortfalls in general, leads one to believe that this strategy will be rendered unavailable by future Congressional legislation. For the moment, however, a Social Security loan is a very real opportunity.