The Social Security gambit

With Social Security inexplicably still in the news, I thought I’d release this post from my queue, in which it has been sitting for weeks.

Frank Curmudgeon of the Bad Money Advice blog succinctly explains an amazing loophole in the rules for collecting Social Security:

I’ve known for a while that seniors can elect to “reset” the year they start taking benefits by paying back what they got before the new start date. So a 70-year-old who started getting checks at 62 can pay back eight years of benefits and start getting much larger checks from then on. What I didn’t realize, and what stupidly never occurred to me, is that the paying back is without interest. …

And it is more than just an interest-free loan. It is also a free option. The downside risk for waiting until age 70 to collect benefits is not subtle. You might not live that long. Kick off the day before you turn 70 and you get nothing. But start at 62 and you can have it both ways. Draw checks for eight years and if you are still in reasonably good health, pay it back interest-free and reset. If not, well, you got some money from the feds while you could.

In case you don’t know, this matters because, as Frank explains elsewhere in the post, Social Security benefits are about 70% larger if you begin taking them at age 70 rather than than at 62. But you may not live long enough to recoup the forgone income between ages 62 and 70. With this Social Security gambit, you can have it both ways!

Start collecting 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. This only works if you really don’t need the Social Security money between 62 and 70. You have to be in a position to give it all back. Also, if you’re in bad health at age 70 you may be better off keeping the money you collected since age 62. If you die too soon, you won’t recoup it. (What’s the age of death that makes this scheme just worth doing? It’s too complicated for me to bother with. You have to assume some rate of return to account for the interest earned from 62-70. Then you have to add to that the present discounted value of the stream of 70% higher checks, again assuming some rate of return. How long until that equals the total SS payments between 62 and 70? That’s the answer. Anybody want to calculate it? If you’re very persnickety you’ll also consider spousal and survivor benefits.)

I knew all this, but I’ve never seen it so clearly explained. It sounds so simple. Why is it legal? And why doesn’t everybody try it? If it is remotely complex (a lot of paperwork?), there should be investment managers selling this as a product–offering to manage your Social Security money so you can have your cake and eat it too. Are they? If not why not?

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