This is actually an odd little teaser that a few readers sent in to me recently — including one who offered a solution that is actually correct (forgot to ask for permission, so I won’t mention the name). Smart readers here, as always.
What we get here, in exchange for subscribing to Steve Sjuggerud’s True Wealth, is an explanation of how you can use “Form SSA-521” to increase your Social Security checks. The teaser says that “every retiree should read this” … and there’s some truth to it, certainly. Though you don’t need to subscribe to anyone’s newsletter just to find out what it is.
I won’t go into great detail on this one — it’s not super sneaky as so many of these teasers are. There is, for example, actually a form number 521 involved, they didn’t just make it up.
What the teaser tells us is that many people can raise your social security payments, and that very few people did so last year, and that even most Social Security Administration employees have never heard of it before. It essentially is a way to restart your Social Security clock — if you have applied for Social Security you know that your payments are much higher if you wait a few years than if you take the payments as soon as you become eligible.
Essentially what’s being teased here is a way to double dip at the government soup tureen.
Anyone who has applied for Social Security can also place a request to withdraw their application. If you applied five years ago and started receiving checks when you were 62, for example, you could file form SSA-521 to request a withdrawal of your application, and then after that’s processed you could apply for Social Security again, this time at the much higher payments you would receive as the 67 year old that you now are.
So what’s the catch? Well, you have to repay any money you received. Which stands to reason, if you’re withdrawing your application five years after the fact you have to pay back those 5 years of Social Security checks.
Why do it? It’s essentially an interest-free loan. As I understand it, you don’t have to pay interest on those five years of payments you’ve received from Social Security, you just have to pay back whatever you’ve received.
Other than that, it’s essentially an actuarial question — how long are you going to live, and how long would you have to live to make it worth it to restart the clock? The payments for someone five or ten years older than the minimum Social Security age can be dramatically higher, so for many folks it will probably be a genuinely good thing to do.
Any other catch? Well, the reason not many folks have done this in the past is that the process for withdrawal of a Social Security application looks like it was generally designed to correct errors, and probably the few hundred folks who did this last year did so because they messed up their application, or didn’t understand the graduated payout schedule and later realized that they didn’t really need to apply yet after all and might as well wait for larger checks.
The wide publication of this idea happened just earlier this year — Laurence Kotlikoff, a Boston University economist, was the one who is credited with bringing this to everyone’s attention. He published his info earlier this year, and it got a fair amount of attention from financial planners and the money media.
So … should you do this? I have no idea, it would probably be worth reading up on it, and talking with your financial adviser, but from the articles I’ve seen it certainly is worth researching if you took Social Security early and you’ve got the money to pay it back, perhaps especially if you are optimistic about your life expectancy from this point.
The bigger question for some folks who are a bit younger, near the time when they can apply for Social Security, is whether you should take early Social Security even if you don’t need it, with the intention of using it as an interest-free loan and withdrawing your application and repaying it in a few years. In my opinion that’s an ethical question as well as a political and financial one — the fact that this is a very new thing for the Social Security Administration means that they may well change the rules to counteract this loophole.
And when you do file SSA-521, you do have to give a reason for requesting your withdrawal, whether you’re going back to work or something else. I have no idea whether they care what these reasons are, or if they ever reject these applications for withdrawal, or will do so in the future.
Certainly there was no intent for Social Security to offer interest-free loans to retirees, so I wouldn’t be surprised to see them clamp down on this eventually. I have no idea what impact that might have on folks who tried to game the system by taking Social Security payments early with the intention of paying them back, but it’s something to think about — I would consider this a loophole, so it would not be surprising if they didn’t make any provisions to “grandfather in” folks who tried to exercise this loophole. My perspective could certainly be very wrong, I’m no expert on Social Security, nor am I a financial planner, this is just my opinion.
Here’s a start for you if you want to read up:
The explanation from the Social Security Handbook is that yes, you can replay your benefits and withdraw your claim, click here to see their formal explanation — it’s 1515.2. The actual form is really called SSA-521, you can download the pdf here if you like.
There’s a very brief explanation of what it is in a story from Marketplace (the NPR show).
There’s an article from Investment Advisor magazine that explains how this works.
And if you want to see ground zero of this, here’s an explanation of the numbers from Dr. Kotlikoff, the economist who brought this to the attention of a lot of folks and is quoted or cited in most of those stories. His case study includes a chart that gives you some idea of how this might impact an individual as you begin to understand whether this is a worthwhile thing to do.
If anyone out there in Gumshoe land has done this, or looked into it, feel free to share your experiences or opinions. It’s real, but I’d make sure to run your numbers through the scenarios — you can probably skip Steve Sjuggerud and go straight to whoever you trust for your financial planning advice if you don’t like digging in to the data and the government forms by yourself.