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Don't raise the retirement age, cont'd

Earlier, a reader mentioned that the "full retirement age" for Social Security is really 70: That, and not the more commonly cited 66, is when you can begin collecting the maximum yearly benefit. The difference is large: Compared with benefits you get starting at age 62, the benefits you get at 70 are about 70 percent larger.

That's straightforward enough: Wait longer, get more. But there's a way to game this gap. Frank Curmudgeon (via Austin Frakt) explains:

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.

The danger, of course, is that Social Security could (and, it seems, should) change the rules in the middle of your play. But then you're still getting checks: You haven't lost anything. You just haven't gained it, either.

By Ezra Klein  |  September 7, 2010; 3:07 PM ET
Categories:  Social Security  
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Comments

I believe there is a proposed regulation on the table now to end this option.

Posted by: guesswhosue | September 7, 2010 5:05 PM | Report abuse

I've also read that this option is going by the wayside by year's end, and that those who've already taken it (early social security payouts) will not be grandfathered in.

Posted by: Beagle1 | September 7, 2010 6:18 PM | Report abuse

As if anybody other than the filthy rich could even afford to pay back 8 years of social security payments. This SHOULD fall by the wayside. It is nothing but a handout to people who don't need it.

Posted by: pj_camp | September 7, 2010 9:20 PM | Report abuse

IF at 62 I get $20k, I repay $160k (8x20) at 70. This nets me an extra $14k (70%) pa.... I need to get past 81 to break even, or the govt makes money.

Posted by: DonH6 | September 7, 2010 9:27 PM | Report abuse

The life expectancy of all who are 70 years old is longer than the life expectancy of all who are 62 years of age because those who have made it to their 70th birthday have survived 8 more years of potential mortality than those who are only up to the 62 year milestone. So it is more likely that 70 year olds will make it to 81+ years than that 62 year olds will make it that long, and the strategy of taking benefits "early" and resetting is a smart one in most circumstances. (If you have a much younger spouse who has a lesser earning's record, it may not be a good strategy, that is if you want to be sure the spouse will be well-provided after your death.)

Posted by: 2ndopinion | September 8, 2010 3:37 PM | Report abuse

What was missing from your discussion was the tax rates (Total OASDI and HI).

According to
http://www.ssa.gov/history/pdf/t2a3.pdf the rate was 1% through 1949. It is now 7.65%
So the problem can’t be attributed to people living longer. The problem is that even with a 7 fold increase in tax rates, congress can not resist increasing benefits, especially during election cycles.

Posted by: pjwww | September 8, 2010 6:31 PM | Report abuse

Thanks for the link.

I wrote something of a follow-up to that post:

http://badmoneyadvice.com/2010/08/bad-advice-at-any-price.html

in which I discuss my horror at finding out that all of 500 people took advantage of the paying back option in 2007. Out of 37 million SS recipients.

And of course it shouldn’t be legal. It’s a rather pointless waste of government money. But I am sure it is one of those loopholes that was unintended and unforeseen. The facts that the SSA apparently didn’t think this through, and that so few Americans have taken advantage of it, speaks volumes.

Posted by: FrankCurmudgeon | September 9, 2010 4:18 PM | Report abuse

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