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For nearly two years, I’ve been telling current Social Security recipients to consider using a little-known provision to boost their payments substantially.
And in recent months, I ratcheted up my warnings to act quickly because there were rumblings that lawmakers were going to close up this loophole.
Well, last Wednesday, my fear came true: The Social Security Administration announced that retirees would no longer be able to use this powerful “payback strategy.”
If you managed to act already, congrats — you scored a great deal!
However, the bad news is that I think the Social Security Administration’s announcement is clearly a “shot across the bow” to all of us. More on that in a moment.
But first, in case you missed this opportunity, I want to talk a little bit more about …
The Little-Known Provision That Allowed Social Security
Recipients to Get an Interest-Free Loan from Washington!
As you probably know, every month you delay taking payments from Social Security your future benefit payments increase … up until the time when taking payments becomes mandatory.
The formula is designed to work out almost the same no matter when you start … in theory, at least.
However, in practice, there are better and worse ways to play it. And while I have my own general rules, the decision largely depends on a number of factors not the least of which is your current health and life expectancy.
So let’s say you made this decision many years ago. You started taking your checks as soon as you were eligible. And you’ve been collecting Social Security for many years since then.
Today, you still feel great. In fact, you feel better than you ever expected to at age 70.
Man, if only you would have waited to take your first Social Security check until now, you probably would have come out way ahead since it feels like you’re going to live another twenty years!
Well, up until last Wednesday, there was actually a way to make this happen.
That little-known provision I’ve been talking about allowed you to pay back everything you collected — without interest — and begin taking a higher payment as if you’d never made your previous decision!
You would have started receiving new benefit checks based on your current age, and your future cost-of-living adjustments would have been based on that much higher amount, too.
Heck, even if your spouse looked poised to outlive you by many years, he or she could have benefited from the higher amounts, too!
Was there a downside? Yes. You needed enough money to pay back what you collected.
However, as I suggested in my retirement report, even if you didn’t have the cash in liquid savings you could have tapped home equity. That would have given you an interest deduction, plus the chance to repay the loan with your now-higher Social Security payments.
Sure, all the details were right there in Social Security Form 521 and IRS Publication 915. But obviously most people had no clue about this strategy. In fact, only about one in 400,000 Social Security recipients ever took advantage of this interest-free loan from Washington.
Yet even that number was too high for lawmakers!
Which I think says it all …
Washington Is Frantically Trying to “Fix” Social Security
And This Is Just the Beginning of the Changes Coming!
Think about it: This was a relatively obscure provision that very few folks even knew about, let alone acted on.
Still, lawmakers worked behind the scenes to shut it down as soon as they realized that even a handful of financial professionals like me were telling people about it.
For its part, the Social Security Administration says processing the requests was “a poor use of the agency’s limited administrative resources in a time of fiscal austerity.”
Oh, right. Out of all the things the Administration does, this was the big time waster?
No, the real take away here is something far more important: Washington is finally going to turn its attention to cutting costs in areas that were previously taboo — including Social Security.
In fact, I think 2011 is going to prove the year that we see BIG reforms in Social Security.
The last time the system had a major overhaul was 1983. And if anything, the system’s sustainability and Washington’s fiscal irresponsibility have both gotten a heck of a lot worse since then!
Will these changes cut current recipients’ benefits in an outright manner? They could, especially since a precedent is already being set by a number of states trying to cut pension benefits or reverse past benefit increases.
However, there would be substantial political backlash if lawmakers go this route, and the logistics involved would also be quite complicated.
It’s far more likely that Washington will continue “going through the back door” as they just have here with this loophole closure.
In short, they will probably expand the taxation of Social Security benefits for higher-income recipients.
By approaching it this way, politicians will be able to say that they have NOT cut benefits, even though they effectively have. It will also be easier for them to implement because there will be no changes to Social Security formulas. And obviously it will look better to the vast majority of Americans.
Where they will draw the “high income” line is anyone’s guess, but I’m betting they’ll be fairly aggressive.
Meanwhile, for future recipients, I expect more substantial changes — including much higher qualification ages and the possibility of altering the inflation adjustment formula, too.
You heard it here first!
Best wishes,
Nilus
P. S. For now there are still other strategies you can use to maximize your payments. In fact, I highlighted more of them in that same retirement report that talked about the “payback provision.”
{ 10 comments }
I paid back my early SS in January of 2009 and I’ve had problems with Social Security and the IRS ever since. It took three months for Social Security to correct my SSA-1099 to show a negative amount. The IRS is still not accepting the negative amount. So I can see why Social Security is saying this is taking too much effort. The latest wrangle is they want to increase my Medicare payment because my income was too high in 2009. That’s because they added the negative amount instead of subtracting it. So I sent it back to them to fix it again. Since they don’t know how to handle even a small percentage of paybacks, I can see why they don’t want to do it anymore. I just hope to get this all fixed by next year!
Roz
I was able to take advantage of the withdraw (app) / refile as SS calls it. It took months, and only when I contacted the head of SS via email was effective action taken. He turned it over to a lady that knew the tech people that had the experience and knowledge to do it. It might never have gotten done if it had not been for her.
I believe the local office told they had had only 7 people do this in the last 10 years.
HI Nilus,
I was aware of several SS loopholes, none of which were applicable to a single person, which I am. Apparently, it only worked for a married couple.
Yona
I have started to collect SS @ 62 years of age in Sept 2010. What I am unsure is, if the status quo is unaffected and I am allowed to payback for a higher amount? How is child/dependent effected. In other words, when I signed up to collect SS, I was indicated that I will receive $ for any child in the household under 18 years of age in primary or secondary education. The cut off is up to 19years old if the child is still in secondary school. We are talking substantial dollars (over $10K), and I don’t know where this will stand, luckily I did go after early SS.
Granted its only for a small percentage of the population, but it is stil a caveat that most people are unaware.
I was aware of the payback availability program, but saw a number of problems with it. Say 5 years had gone by and you had collected $100K from Social Security – You pay that money back – and get the larger monthly payment.. One problem is if you die shortly thereafter, certainly lowered the value of your estate. Second, you loose the use of the $100K – and if you have a relatively successful strategy in the stock market (like writing cover calls on relatively high dividend paying stocks) – you have to make up that amount int he excess SS payment – over the last year I am up close ot 50% (exceptional year but still) – so, by the conversion I would have taken a big loss in income, not to mention that if SS does make drastic changes, the future value may not turn out to be so much better as believed, and the eventual recovery of the $100K might occur with much higher taxed dollars with a real value of much much much less. Time will tell, but I may a conscious decision that that program was probably ot going to work out to my benefit given the future I forsee.
Seems to me the real shot across the bow of SS is the decrease in the “payroll tax” stuck on the Bush tax cuts extension. Actually it is the first nail in the coffin. Obama sold Social Security down the river so he could get the unemployment extension. Does anyone actually believe this cut in income for the SS fund will be “temporary?” Right, the same way the Bush tax cuts were temporary.
Save the rich, flush the poor.
what was that Form # again for filing ? Does it now expire in 2010 or does it expire in 2011 ?
If the Social Security Account was left alone by Washington and utilized ONLY for the purpose it was designed for, then no Fix would be needed. First, take it out of the General Fund to pay for military planes and equipment, and anything else that needs to be paid for by the government. A little known fact is that at one point in history, Social Security was in its own lock box treasury fund and was used only for Social Security purposes.It was doing so well financially with a surplus, that our government took it out and placed it in the General Account. Social Security has plenty of money for qualified recipients many, many years into the future, IF it was placed back in its own designated account with” HANDS OFF” by our government. This little known fact needs to be spread quickly to voters and to their Congressional representatives.
Yikes! For those who planned to pay back the Social Security income for several years, one would think the Treasury would welcome the chance to “play the odds,” (meaning, that the taxpayer life expectancy might make the repayment a good bet for the government program). Thanks for shedding some light on the “rationale” for closing the option.
Two thoughts – one, did the voters have any say with this bureacracy over their decision? Was there any thought given to “grandfather/grandmother” all of those who had started receiving benefits by the year 2010? This policy change seems arbitrary for those who may have waited to take their benefits if they knew they were going to be affected, (Nilus, any thought on that angle? Did the government change their policy in order to stop people from taking early benefits?). Obviously, receiving checks from taxpayers “paying back” the Trust Fund created new accounting issues! I wondered how they were going to do and track it!
My second thought is: Why not have alternative payment systems to those who qualify? For example, insurance companies offer a cash, “lump sum” payment in lieu of the multi-year payout.
Obviously, this system needs a lot of work!
The real “shot accross the bow” here is that the Social Security Administration is breaking the contract it had with all those it induced to take social security at age 62 because this payback option was in existence when they made their decision to file early. Those who have collected SS for more than one year can no longer pay back and start over as they had been promised (in writing in Social Security literature) at the time they chose to file for early benefits. If this kind of change to the rules was made by an individual or business after the contract was signed, it would be considered outright fraud. So apparently the Social Security Administration may be using this “little” fraud as a stalking horse and figure they can get away with it easily because it only effects a few (who they have already slandered as being “wealthy”) to set a precedent for much wider future frauds against social security recipients.
After this surprise rule change, enacted suddenly without the usual 60 day comment period, 99% of the roughly 600 comments, received during the next 60 days, opposing the change made it clear that most of those being hurt by this change were far from wealthy. You can read the comments at http://www.regulations.gov/#!docketDetail;rpp=10;so=ASC;sb=postedDate;po=640;D=SSA-2009-0073
Likely in the near future, new rule changes will be enacted, one at a time, probably they will effect gradually increasing numbers of social securtiy recipients. If this precedent, allowing changing the rules after the fact (fraud), is allowed to stand, all social security recipients are are likely to eventually be defrauded. The time to fight this battle is now. Just because one can’t sue the government is no reason to allow them to defraud us. Send a message to your congresspersons that if they don’t immediately overturn this “change” in the social security payback rules, that amount to a fraud upon those who have received SS benefits for more than one year, you will lose all faith in their legitimacy to govern and will be voting them out of office in favor of candidates who will promise not to allow the defrauding of the American people to be tolerated by any entity, including our own government.