As more and more of the “baby boomers” (individuals born between 1946 and 1964) retire, the decision of when to start receiving Social Security retirement benefits, and on whose benefits (their own, a current spouse’s, or a former spouse’s) they will apply for, will need to be addressed. In a series of columns discussing strategies for receiving Social Security retirement benefits, this column discusses the “do-over” option.
As a review, an individual can collect a Social Security retirement check provided the individual has at least 40 credits of Social Security. This retirement benefit may be collected as early as the first full month after the month the individual becomes age 62. But if the individual starts collecting starting when they are age 62, the retirement benefit will be permanently reduced. The earliest age an individual can collect a full Social Security retirement benefit is their full retirement age (FRA). FRA depends on what year an individual was born. The following table summarizes FRA by year of birth and the portion of the full retirement benefit (claimed starting the month an individual reaches FRA) that an individual will receive if the benefit is claimed starting the first full month after the individual becomes age 62.
Full Retirement Age (FRA) by Year of Birth and Percentage Amount of Full Retirement Benefit Payable at Age 62
Until December 2010, the “do over” strategy allowed individuals to collect reduced Social Security retirement benefits starting as early as age 62 and, at any point up to age 70, “withdraw” their application for benefits, thereby stopping their monthly Social Security retirement benefit. Recipients could then repay all of their accumulated monthly benefits they had received to that point (without penalty and interest), and then at any time restart their benefits at a higher rate. The following example illustrates:
Frank was born Feb. 1, 1943. His FRA is age 66. In early 2005 Frank made the decision to receive his Social Security monthly retirement benefit. His monthly benefit was reduced by 25 percent as a result of starting his Social Security monthly retirement benefit at age 62. By the time Frank reached FRA in 2009, he had collected a total of $100,000 in Social Security retirement benefits. But in early 2009 after selling his principal residence for a profit, Frank repaid to the Social Security Administration the $100,000 in total benefits he had received to date. As a result, Frank’s Social Security benefits were increased by 25 percent when he restarted his monthly benefit in late 2009.
Although these repayments often exceeded over $100,000, before 2010 repaying the Social Security Administration was significantly cheaper than buying an immediate annuity from an insurance company that would generate the same amount of guaranteed income. The “do over” strategy essentially amounted to an “interest-free” loan from the Social Security Administration.
But effective Dec. 1, 2010, the Social Security Administration stopped the “do-over” policy. Under new Social Security Administration regulations that took effect in December 2010, an individual can repay benefits only once in a lifetime, and it must be within 12 months of first claiming benefits. If an individual changes their mind 12 months or later after they initially started their benefits, then they cannot take advantage of the “do over” strategy (“withdrawing” their application).
The question then becomes: Are those individuals who started collecting Social Security retirement benefits starting after 2010 before their FRA and have collected these benefits for more than 12 months out of luck with respect to the “do over” strategy? The answer: Not necessarily.
There is another little known Social Security Administration option that allows individuals who have reached their FRA to voluntarily suspend – but not repay- the Social Security benefits they are receiving. Besides suspending their own benefits, the suspension of benefits includes family benefits received based on their earnings records, such as spousal and children benefits. The suspended benefits earned delayed retirement credits equal to eight percent per year for each year they postpone collecting their benefits until age 70. Consider the following example:
Jean is entitled to a Social Security retirement monthly benefit of $1,600 at her FRA of 66. Jean started receiving her benefit at age 62 at a reduced (25 percent) amount of $1,200. At age 66, Jean contacts the Social Security Administration to suspend her monthly benefit payments. Putting aside any cost-of-living adjustments (COLAs) between ages 62 and 70, Jean’s monthly benefit will increase by eight percent for each year Jean does not receive a benefit until age 70. If Jean decides to reapply for her monthly benefit at age 70, her benefit will increase by 32 percent (four years times eight percent per year), boosting the benefit to 99 percent of what the benefit would have been if she had started collecting these benefits at her FRA.
Here is how the math works: 75 percent (reduced benefits at age 62) times 132 percent (delayed retirement credits from ages 66 through 70) equals 99 percent. For Jean, this means a monthly benefit at age 70 of $1,584 (132 percent times $1,200). Had Jean started collecting her benefit at age 66, her monthly benefit would have been $1,600.
$1,584/$1,600 = .99
Additional Considerations Before “Withdrawing” An Application Within the First 12 Months
Before making a decision to “withdraw” an application within the first 12 months of initially receiving benefits, there are some things individuals need to know about what will happen if they withdraw their application, including:
- An individual who “withdraws” an application must repay all the Social Security retirement benefits based on their retirement application. The repayment also includes any benefits a spouse, a dependent parent or children received based on the individual’s Social Security retirement benefit. Anyone who received benefits based on the individual’s benefits must also consent – in writing – to the “withdrawal” of application.
- Money withheld from the Social Security retirement checks must be repaid. Money withheld includes: (1) Medicare Part B and Part D premiums (for individuals age 65 and older); (2) Voluntary federal income tax withholding for all years prior to the current year; and (3) Garnishments.
- Those individuals who are already entitled to Medicare benefits may also choose to withdraw their Medicare coverage, but they do not have to.
How to “Withdraw” An Application
For those individuals who are within the first 12 months of receiving their Social Security monthly retirement benefits, they can withdraw their application by filling out and submitting Social Security Form SSA-521. Included on Form SSA-521 must be a reason for withdrawing the application. Once the Social Security Administration receives Form SSA-521, they will then notify the applicant as far as how much in total benefits that needs to be repaid.
How to “Suspend” Social Security Retirement Benefits
For those Social Security benefit recipients who are too late for “withdrawing” their application, they can suspend their benefits once they reach FRA. They may do so by simply contacting the Social Security Administration at 1-800-772-1213 and state they want to suspend their benefits. Note that a suspension of benefits cannot occur until the recipient has reached FRA. They can restate their monthly benefits at any time thereafter by contacting the Social Security Administration.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Financial Consultant, Chartered Life Underwriter, Registered Health Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in Silver Spring, MD — and the owner of EZ Accounting and Financial Services, an accounting, tax preparation and financial planning firm also located in Silver Spring, MD. Zurndorfer is also is an instructor at federal employee retirement seminars throughout the country and writes numerous columns and books on federal employee benefits.