Warning: Social Security PayBack System May be Discontinued

[gailwinters]

I'll be 62 in March and I am going to start drawing SS then. My hubby started at 63 1/2. We actually thought about doing the payback on his, but ultimately decided against it.

We will be in the lowest tax bracket, and actually will have very little taxable income. We know we're giving up some pretty large dollars in the long term, but it just seems right for us.

 

[molly]

We are 63 and "staying the course" until In the meantime, we have sufficient pension income combined with savings that keeps us and the dog "covered". We are planning on not touching our investments for awhile - if possible.

 

[Trek]

I'm 38 and been retired for 3 years. I do not include SS into the equation at all. Never crosses my mind that I will ever get it.

 

[Orchidflower]

This has not been mentioned yet, so let me ask: I just started at 65 taking SS and was definitely planning to give it back and re-start at 70. If this law goes thru then I assume it is still smarter to give the money back to Uncle Sam and just re-start at 70 when I turn 70 some years from now? We are STILL getting more if we wait until we turn 70 aren't we or are they cutting that out, too?
(I don't need the money now, so this would be no hardship.)

Did I miss catching exactly when we are going to be getting 78 cents on the dollar? Does that mean they are giving us shorter checks? Or the dollar will be worth 78 cents in value later on?

 

[RonBoyd]

This has not been mentioned yet, so let me ask: I just started at 65 taking SS and was definitely planning to give it back and re-start at 70. If this law goes thru then I assume it is still smarter to give the money back to Uncle Sam and just re-start at 70 when I turn 70 some years from now? We are STILL getting more if we wait until we turn 70 aren't we or are they cutting that out, too?
(I don't need the money now, so this would be no hardship.)

Did I miss catching exactly when we are going to be getting 78 cents on the dollar? Does that mean they are giving us shorter checks? Or the dollar will be worth 78 cents in value later on?

It was my understanding that the way this really works is that you take all of your SS withdrawals (found money, in this case) and invest it during the ensuing years. Then years later, give it all back -- except all that interest earned -- penalty-free and you then can collect all that additional [-]interest [/-] money the guvment owes you for not taking any out of the system early. Or something like that.

 

[Orchidflower]

RonBoyd, yes, that was what I was trying to do exactly by starting my SS at 65 (when I first found out about this found money or I would have taken SS at 62 like the smart people did) and then I plan to give it back to Uncle Sam when I was 2 months away from 70 (minus my interest on the SS I already collected, hence, the found money).

Then what the heck are they doing with this loophole? Not allowing me to re-start at 70 even if I give the money back or what? What am I not understanding from this thread?

 

[RonBoyd]

Then what the heck are they doing with this loophole? Not allowing me to re-start at 70 even if I give the money back or what? What am I not understanding from this thread?

Well, there are those that would argue that "You agreed to forgo the higher rate" when you requested the early entry point. Furthermore, they would say that you shouldn't collect any earnings on money you withdrew from the system... particularly by simply "paying it back." (Sorta like "I shouldn't be in jail for bank robbery because I turned myself in and gave the money back.") How silly of them, huh? Or something like that.

 

[Orchidflower]

I'm going to check into putting it back now then. I just don't want to take any chances with not being able to re-start at 70. Just what I need: one more thing to take care of.

 

[rayvt]

The whole thing is silly. Much ado about nothing. This is like being excited that you can get a $20 bill from the grocery store and all you have to do is give them 4 $5 bills. But man!!! They gave me a twenty!!!

The primary advantage is that if you do it at 66 or 70 or whatever, you know that you've lived past age 62. What people fail to realize is that what you are really doing is indeed, merely starting over. Duh. You give them back all the money you've collected and then restart it at your current age. If you die the next day, you (well, your heirs) lost all the money that you collected from age 62. When you give it back, you also give up all the advantage of the money you collected. I fail to see the attraction. It's not like you get to get the new larger payout *and* keep the money they already paid you.

The SS admin explicitly says that the benefit levels are set so that you'll collect in your lifetime the same amount of money no matter when you start.

Okay, granted, you _do_ get to keep whatever interest you've earned. And you did get the benefit of being able to keep the money you collected, if you had died before giving it back.

 

[lhamo]

A key question:

WWWBD -- What would Warren Buffett do? Does anybody know?

lhamo

 

[Orchidflower]

rayvt, if I am understanding your post, do you realize that you make out much better by starting SS at 70--but only if you live alot longer Both my parents lived into their 90's, so I'm playing the numbers and assuming I will, also. By re-starting and beginning to collect at 70--and assuming I live to 90--I will do so, so, so much better than by beginning collecting at 62 (or 65 as I didn't sign up then).
There must be a chart on this somewhere on the net to back up my statement.

 

[donheff]

The whole thing is silly. Much ado about nothing. This is like being excited that you can get a $20 bill from the grocery store and all you have to do is give them 4 $5 bills. But man!!! They gave me a twenty!!!
What people fail to realize is that what you are really doing is indeed, merely starting over. Duh.
Okay, granted, you _do_ get to keep whatever interest you've earned. And you did get the benefit of being able to keep the money you collected, if you had died before giving it back.

Well, as you put it "duh," - your last two sentences are the answer to why it isn't silly. And don't belittle the difference between deciding to take a larger payout when you are already near 70 and having to decide the issue at 62. SSA says a 62 YO has a life expectancy of 80.91. A 70 YO has a life expectancy of 83.3. If Al is correct and you can take a tax deduction for IRA funds you use to pay it back it is a great deal. As Burns or someone someone said a while back, this is the cheapest, most secure cola'd SPIA you can buy.

OrchidFlower - no need to act immediately on a rumor. All you have to do is pay attention to the issue and file if SSA actually proposes to change it.

 

[nphx]

There may be some warning to avoid litigation. Consider this:

"... plaintiffs argue that there is nothing in the federal Social Security law that says a retired person who chooses not to apply for Medicare coverage will be stripped of his or her Social Security benefits.

But in 1993 and 2002 the Social Security Administration issued rules in the Social Security program operations manual stating that retirees would lose their benefits if they opted out of Medicare Part A, the government's hospital insurance entitlement program.

The plaintiffs argue that the Clinton and Bush administrations put the new rules into effect without following the Administrative Procedure Act, which requires notice of proposed rule-makings and appropriate comment periods for the general public.

In letting the case move forward, Judge Collyer said there is nothing in either the Medicare Act or the Social Security Act requiring the plaintiffs to pay Social Security benefits back to the government to get out of Medicare."

Retirees Who Want to Opt Out of Medicare Can Sue Government

 

[Martha]

I posted on this about a year ago. The Inspector General has issued a report to the SSA regarding the loophole which allows people to pay back SS without interest and then reapply to get the higher benefit. http://www.ssa.gov/oig/ADOBEPDF/A-05-08-28110.pdf

As a result of this report the loophole could disappear at anytime if the SSA decided to change its current policy.

The suggestion in the report is:


. . SSA may want to modify the criteria for withdrawing Title II benefit
applications and limit its use. For example, withdrawals could be limited to cases where
(1) work activity has significantly reduced the amounts received by the beneficiary and
(2) the beneficiary has yet to reach FRA. SSA may want to also ensure beneficiaries
are aware of the implications of this withdrawal process, which may entail placing
additional information on SSA’s website.


The prior thread: http://www.early-retirement.org/for...t-it-instead-of-waiting-41897.html#post774195

 

[samclem]

A key question:

WWWBD -- What would Warren Buffett do? Does anybody know?

lhamo

Well, based on what he does with income taxes, Warren would:
- Hire the very best attorneys and accountants to figure out how he could get every dime possible out of Social Security. He'll arrange his affairs in an extremely complex fashion to milk every possible SS benefit.
Then
- When the political season arrives, he'll write a bunch of letters about how he shouldn't qualify for any Social Security at all, that the system isn't fair. (But he'll keep taking the payments and not give anything extra back to the government).

 

[Rustic23]

This is off thread, but I thought worth posting. I have complained before about the fact that you can not get a SS estimate of payment once you start Medicare. The only way to get your estimate benefits was to call them and they would figure it out on the phone. Well, that has changed. I got an estimate on-line yesterday. It had a caveat 'this does not include Medicare reductions'. It only took them two years to figure that statement out!.

 

[rayvt]

When I first heard of this I was excited at the possibilities. But after I pushed some numbers around came to the conclusion there was no there there.
The SS admin is very unlikely to close this "loophole" because it is NOT a loophole. There is no substantive benefit to doing it, and it doesn't cost SS anything when somebody does it. It's pretty much like trading ten dimes for a dollar bill.

As Burns or someone someone said a while back, this is the cheapest, most secure cola'd SPIA you can buy.

Yes, hence the title of the very first article on the topic: "Where can a 70-year-old buy the least expensive life annuity?"
But too many people read into this much more than what it really is. For someone who is in just the right circumstance it is the cheapest way to get this specific annuity. But that's it.

...[in rayvt's earlier post] last two sentences are the answer to why it isn't silly. And don't belittle the difference between deciding to take a larger payout when you are already near 70 and having to decide the issue at 62. SSA says a 62 YO has a life expectancy of 80.91. A 70 YO has a life expectancy of 83.3.....

Granted. But I still don't see the advantage. If your plan is to return the money when you hit 70, then by definition you didn't need it. So, you return money you didn't need in order to collect a higher payout--that you also probably don't need. But if you didn't need it at 62, then you could have just waited until you hit 70 in the first place.
Since you must save the payments so you can pay it all back, you don't really get any tangible benefit from collecting them.

What you mainly get is an intangible benefit---the fact that your heirs can keep the money if you die before paying it back at 70. The tangible benefit you get is keeping the interest the money will earn in the savings account. If you get 2% after tax (as if!!), you'd get a total of $8000 of interest in the 8 years from 62 to 70 for each $1000 of monthly benefit. At 1% net, you'd get $4000. These two benefits are better than a poke in the eye with a sharp stick, but they are trivial.

Here are some figures from an actual SS benefit statement:
Age 62, $1744/mo
Age 70, $3054/mo
Seems a significant difference until you do the math.

62YO living to 80.9 = 18.9 years = 277 months. Times $1744 = $483K
70YO living to 83.3 = 13.3 years = 160 months. Times $3054 = $488K
A $4K difference over a timespan of 20 years is trivial, and nothing to get excited about.

But if the person dies at, say, 75:
62 YO living to 75 = 156 mo. times $1744 = $272K
70 YO living to 75 = 60 mo. times $3054 = $183K
That $89K is a large amount of money at risk to lose out on. IMHO.

 

[MasterBlaster]

When I first heard of this I was excited at the possibilities. But after I pushed some numbers around came to the conclusion there was no there there.
The SS admin is very unlikely to close this "loophole" because it is NOT a loophole. There is no substantive benefit to doing it, and it doesn't cost SS anything when somebody does it. It's pretty much like trading ten dimes for a dollar bill.

The loophole, if you can call it that is that the money paid back does not include an interest charge. So you can pull out the money at 62, invest it, keep the interest. Then you can pay back your draw and get the higher amount as if you started later.

But I must agree with you, there isn't really much there and more ink has been printed on this topic than it's worth.

 

[haha]

There are other negatives to paying back. If you are already getting Medicare, and don't have more than an AGI as modified of $85,000 you are paying $96.50/mo for Medicare Pt B. If you stop SS, your monthly Medicare payment will increase to $110.50. Not a big deal, but it does show how small things you might not think of can bite.

Then there is the problem of possible changes to the benefit formula. I formerly though this was very unlikely, but since I see how much has been spent over the last couple of years, with two wars, uncountable bailouts, and now the health bill, I am not so sure.

Some say that those over a certain age will be grandfathered at current rates. I don't think so. I think that income testing may come, and after that, even asset testing. But the money that we already have we will continue to have; they won't try a clawback. Once we write that payback check we may never see that money again.

So payback might be clever, but it also might not be.

Ha

 

[rayvt]

rayvt, if I am understanding your post, do you realize that you make out much better by starting SS at 70--.... By re-starting and beginning to collect at 70--and assuming I live to 90--I will do so, so, so much better than by beginning collecting at 6x...
There must be a chart on this somewhere on the net to back up my statement.

There's a good spreadsheet here: http://web.bryant.edu/~rmuksian/textbook/Breakeven62vsNormal.xls

Unfortunately he doesn't include the effect of earnings (interest) on the early money you collect. I discussed this with him via email, and he agreed with my findings, but he's never modified his SS.

Basically what you do is start collecting SS at 62 and save (not spend) the monthly checks until normal retirement age (or age 70). Then, at N.R.A. (or 70) you start to withdraw from the savings account, the shortfall between the SS benefit you would have received if you had waited until that age and the amount that you are actually getting from SS. So you collect the entire N.R.A. amount, some from SS (the age 62 amount) and some from your savings account.

When you are looking at financial figures that run for decades, you absolutely *must* include SS COLA and earnings on the early benefits collected. And you need to use your own personal figures that SS provides.

I slightly modified his spreadsheet to include interest earnings, and ran the numbers for age 62 vs N.R.A. of 66.
For me, with 3% COLA and earning 3% interest, the break-even age is 88.6. That's 26.6 years.
With 3% COLA and earning 5%, it's age 97.7.
If I can earn 6%, the BEP is basically infinity. Even at age 106 the NRA amount still hasn't caught up.

Even at only 1% earning, the BEP is age 84. That's still 12 years to break even. Far too long for me.

 

[donheff]

I guess I would agree that the gist of his thread is that the payback option is not a very big deal. But the various analyses people have made show that it does appear to make more sense to take SS at 62 whether you intend to re-apply or not. Even if you spend the money it would be worth investigating whether your circumstances warrant buying back the years at 70 using other 401k/IRA money. The later would likely depend on whether Al's original post about deductibility is true.

 

[rescueme]

I guess I would agree that the gist of his thread is that the payback option is not a very big deal. But the various analyses people have made show that it does appear to make more sense to take SS at 62 whether you intend to re-apply or not.

I don't agree ...

It all depends on your personal situation, IMHO.

Collecting at the earliest eligibility (in some cases, as I outlined in a previous response) presents the question of just because you can doesn’t necessarily mean you should. All possible combinations of your personal situation facts, along with your feelings related to "leaving $$$ on the table after you pass" have to be considered. There is a different answer for each person - and each couple. There is no right, nor wrong answer to the question, due to the variables.

As for me/DW? I'm 62 - she will be in a few months. Somewhere between age 62 and her FRA age of 66, she will retire (not yet accepted the fact that she's getting old - but that's another subject).

Anyway, I'm planning on filing against her as her spouse at age 66, and get 50% of her FRA benefit (yes, even if she takes it at 62, I can get 50% of her age 66 benefit). That will be just under $1k/month that I'll get in "her" SS benefit between the ages of 66-69.

At age 70, I will file for my SS benefit, which will be 175% of my age 62 (current) benefit.

Being that we're the same age and it is expected that she will outlive me, this solution gives me SS income (albeit, not my own) starting at age 66, but ensuring her income after I pass at around 2.5x her age 62 benefit.

As for collecting ASAP because we may pass before we "get our $$$"? Doesn’t matter to us. We don't figure on spending it in the afterlife (not that I believe in one ).

Current cash flow in retirement is most important to us. Also, we've always had the belief that we would rather die with money than live without it.

 

[TromboneAl]

Here are some figures from an actual SS benefit statement:
Age 62, $1744/mo
Age 70, $3054/mo
Seems a significant difference until you do the math.

62YO living to 80.9 = 18.9 years = 277 months. Times $1744 = $483K
70YO living to 83.3 = 13.3 years = 160 months. Times $3054 = $488K
A $4K difference over a timespan of 20 years is trivial, and nothing to get excited about.

You've actually got a pretty good point here, and have caused me to rethink this a bit.

However, SS, being an annuity, takes some uncertainty out of life, and is insurance against the possibility that you live longer than you expected. Let's say the person lives to be 100 years old.

62YO living to 100 = 38 years = 456 months. Times $1744 = $795
70YO living to 100 = 30 years = 360 months. Times $3054 = $1099K
Difference = $304K

Not only is $304 some serious coin, but if the guy ran out of money at age 92, and needs $2,500 per month to live, the repayment would have been a great idea.

 

[TromboneAl]

Let's say the SS goes to asset testing or even income testing. I wonder if this would have a dampening effect on saving for retirement?

"Save for retirement, kids, but if you do, you'll get less SS, so on second thought..."

 

[RonBoyd]

<snip> Not only is $304 some serious coin, but if the guy ran out of money at age 92, and needs $2,500 per month to live, the repayment would have been a great idea.

But isn't that true of all insurance? you are simply betting against the gods. (Not being fluent in statistics) I am guessing that there would be as many people at the beginning of this cycle as at the end with the majority being somewhere in the middle. The pay-out being determined by the early "drop-outs" paying for the "hanger-ons" -- and a big bunch for the Insurance provider. All those in the middle? They break-even to varying degrees.

It's your money, place your wager on where you feel you personally fit into the overall scheme of things.