The once obscure regulation that it is possible to repay all that you have collected from Social Security has been written about in many newspapers and financial magazines of late. The vast majority of the advice in these articles suggests that it is a wise move to exercise the repayment option and collect a bigger payment check in the future. Is it really that good a deal?
Let’s take a helicopter ride over the pros and cons.
If you are eligible and are now receiving Social Security payments before the age of say 70, you are getting less money per month than you would get if you had waited until you reached age 70 – that’s common knowledge. How much less you will receive is described here, and depends on what age you actually sign up for the program. If you sign up at age 62, the difference can be substantial.
The payback option in a nutshell
The Social Security payback option works like this. If you are willing and capable of returning all the Social Security payments you have received to date, you may refile immediately, and start to collect a much larger monthly check for the remainder of your life.
The benefits of payback
The government does not charge you any interest on the money you have already received and pay back, so in effect, you are repaying a non-interest bearing government loan.
You will earn tax credits for the taxes you paid on the benefits.
If one spouse does not collect Social Security benefits and is the smaller contributor, by repaying the money received by the primary contributor, the surviving spouse will continue to receive the “new” increased benefit amount upon the passing of the primary contributor.
The “new” increased benefit will grow with the cost of living (COLA), e.g., a 3% increase on $1500 per month, is much greater in dollars than a 3% increase on $900 per month. Ever considered your Social Security benefit as an annuity with a built in cost of living accelerator? You can read our article on this interesting concept here.
Why more people do not take advantage of the payback option
These are difficult economic times. Many of the people who collect early benefits need the money. It is not easy for most Social Security recipients to find excess cash that can reach the $100,000 mark to repay the government for benefits already received.
Skeptics and people with health problems are not sure that if they pay back Social Security money today, they will live long enough to make up and gain from the increased benefits in the future.
The hardly ever-mentioned reason for not pressing the payback button right now
The Bird-in-the-Hand Club. There are a growing number of retired taxpayers that predict the enormous US deficit will eventually require more “sacrifices” from some of those receiving Social Security. These people remember when Social Security benefit payments were not taxable – now they are.
This group of “take the money and run” believers, think that it is not hard to imagine a time when prudent retired savers and investors – those that have amassed substantial assets or have significant investment income – will be asked to pay their “fair” share of the deficit through reduced Social Security benefits.
If you are considering the payback option
You will need SSA Form 521. You should also be aware that like other relatively generous government programs, this one is being eyed for extinction – or at least a spot on the endangered species list. It may be that in the near future only recipients that recently started receiving Social Security payments will be allowed the option to repay benefits and start over. It seems that for some, there really is no free lunch.
Before you press the reset button on Social Security, do your homework. To start, the Social Security Administration has a wealth of information on its website.
The information contained herein is general in nature, is provided for informational purposes only, and should not be construed as tax or legal advice. Before you act on any financial advice that you read here or elsewhere, be sure to seek the counsel of your financial, and/or tax adviser. There are many roads to financial prosperity, get to know all your options.