If you didn’t know about the social security do-over by now, it may be too late. An obscure loophole also known as the Social Security payback option, or Social Security double-dip, lets retirees pay back the government money they received at an earlier age. This allows them to resume collecting bigger Social Security checks by starting over when they’re older. The Social Security do-over strategy turns out to bring a higher return than using the same amount of money by buying something like an annuity from an insurance company. But the practice is becoming so popular that the Social Security Administration wants to end it.
Social Security payback option catches on
Only about 500 people took advantage of the Social Security payback option in 2007. The strategy is becoming more popular ever since a series of articles in Kiplingers about maximizing Social Security benefits. Kiplingers reports that by 2009, the number had almost doubled. Retirees learned that they could repay the benefits they had collected so far, with no penalties and no interest and then restart them to receive bigger payouts. Better yet, a tax credit or a tax deduction can be claimed for income taxes paid on the benefits paid back.
How to double-dip Social Security
Retirees become eligible for Social Security at age 62. However, by choosing to start receiving benefits that early, the monthly checks are only 75 percent of what they could be by waiting until age 66, what is now officially considered the “normal retirement age.” Holding out past age 66 boosts Social Security checks by 8 percent every year up to age 70. By waiting eight years, retirees will increase their annual benefits by 132 percent. Once the process is started and the benefits are repaid, people can reapply for higher Social Security payments, a larger base amount for cost-of-living adjustments and maximum lifetime benefits for a surviving spouse.
All good things come to an end
Social Security will begin paying more in benefits than it collects in payroll taxes by 2016, according to the annual report of government trustees. Reserves in the form of government i.o.u.’s will be exhausted by 2037, after which incoming taxes will cover three-quarters of benefits. Since Kiplingers let the cat out of the bag, Social Security do-overs have attracted the attention of cost-cutters. Daily Finance reports that the Social Security Administration has sent a proposal to the Office of Management and Budget that gives retirees only one year to change their mind and use the payback option. This change makes the Social Security do-over a way to correct the mistake of taking benefits too early, rather than an investment strategy.