• About that Social Security gambit

    Remember the “Social Security gambit” I wrote about several weeks ago? Very briefly,

    Start collecting [Social Security checks] at 62. Sock the money away and earn some interest. If you’re still in good health at 70, give it back (but keep the interest) and then enjoy the 70% bigger checks. It’s a no brainer.

    Frank Curmudgeon, the author of the post I quoted in my post has a follow up post in which he writes,

    Fewer than 1000 retirees took the payback and restart option [in 2009 …] out of 37 million people getting checks[.] That is 0.0027%. More people played Major League Baseball in 2009 than took advantage of this peculiarity in the SS rules. It almost makes me wonder why the bureaucrats are bothering to even discuss plugging such a tiny hole.

    Well perhaps there is a good reason very few people play this game. A reader took me up on my challenge to compute how long one would have to live to make the scheme worthwhile. He sent a spreadsheet, which I have not validated. But I know the source, and I trust he can do calculations like these properly. He wrote,

    In the base case (pre-age 70 inflation of 3 percent, a marginal tax rate of 25 percent, and a real discount rate of 5 percent), the break-even retirement age is 89. Some changes in assumptions relative to the base case give lower break-even ages. For example, a discount rate of 2 percent reduces the break-even age to 84, or alternatively, a marginal tax rate of 15 percent reduces the break even age to 86. Of greater interest, however, are cases of low inflation (as we are now experiencing) and higher marginal tax rates (encompassing the groups more likely to afford a pay-back). These have longer break-even periods: for example, zero pre-age 70 inflation results in breaking even at age 94, or a marginal tax rate of 35 percent results in breaking even at age 93.

    My conclusion is that most of the people who can afford to repay pre-age 70 contributions to Social Security will choose not to do so. Repaying eight years of benefits is difficult for people with low savings, and those with sufficient funds are in the higher tax brackets. However, for those who are inclined to purchase an annuity in an amount equal to eight years of Social Security payments, the calculation depends upon the cost of plans available on the market rather than the spreadsheet calculations described here.

    I’m no longer irritated that this loophole exists. It seems it isn’t often used and it isn’t very smart to try. Looks like “Phil From Brighton” was right (in the comments to my original post), though he didn’t back it up with a spreadsheet. A spreadsheet really gets my attention!

    Nice job readers!

    • I’m confused. How is this break-even age analysis any different for deferring collecting Social Security to 70 in exchange for a higher benefit amount? One also has to live long enough for deferring to pay off. However, according to many sources, if cash flow isn’t a problem, deferring to age 70 is a smart decision. If one decides to defer to 70 anyway, collecting at age 62 and then paying back is strictly better than simply waiting until age 70.

    • In these times of high unemployment, someone who had expected to work until 66 or 68 or 70 but is now unemployed at 62 or 63 with no unemployment benefits remaining, the question is “do you feel lucky punk”. How long do you live off savings and retirement funds before drawing SS?

      The risk is living off your IRA depletes it too much to prevent “emergency” spending, and catchup rules might not allow replacing IRA funds withdrawn if a good job is found. Drawing SS early preserves the IRA funds and if a job is found, repayment resets. But the recompute of benefit when more FICA earnings and benefit reductions occur is sort of the same thing.

      The repayment option is easier to understand and explain. And my guess is if it is used its most likely when someone is laid off early, draws benefits for two years, gets back the good paying job and repays and terminates benefits until actual retirement or age 70.

      I suppose it is a sign of the time where morality in economics is absurd that some people spend way too much time “screwing the government” as well as shareholders and retirees with paid up homes to get a few bucks.