Friday, February 04, 2011

Social Security Payback Option is Elminated

Historically, Social Security has allowed beneficiaries to payback previously received benefits interest free and restart payments at a higher benefit level. Originally, the payback option was allowed so as not to penalized beneficiaries who could qualify for a higher benefit. However, as the payback option became more known, many financial advisors realized that the option was effectively an interest free loan and a great hedge to protect higher benefits. Thus, a Social Security recipient could start taking benefits at 62, put the money in the bank, earn interest, return all the payments at 70 and begin receiving the higher monthly benefit. Not only would the beneficiary be guaranteed higher payments the rest of his life, he would also get to keep all the interest earned for 8 hears. Of course, this assumes the beneficiary did not need to spend the money on living expenses.

Effective December 8, 2010, Social Security has eliminated the current payback option. Beneficiaries can no longer payback benefits and restart at higher payments indefinitely. Paybacks must now be initiated with 12 months of starting benefits and can only be done once in a lifetime. In addition, suspending benefits voluntarily can only be done for payments that have not been received, i.e. one cannot suspend benefits earlier and repay payments. The elimination may save Social Security as much as $5.5 billion if every beneficiary with sufficient liquid assets used the payback option.

While I had evaluated the benefits of using the payback option, I am not unhappy Social Security has eliminated the do over. Losing the option will eliminate a retirement benefits scenario and reduce our decision to simply when I start taking benefits and when my wife starts. As I get older, simpler is definitely better :-)

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial or retirement advice. Please consult a professional advisor.

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