Paying Back Social Security: Does It Make Sense?

It sounds far-fetched, but repaying the government for the Social Security benefits you’ve already received may boost your monthly income. Here’s how it works:

Say you retired and began receiving Social Security benefits at age 62. You’re now 70. You can repay the money you’ve already received  and then reapply for Social Security. Because you’re older, your new checks will be larger every month.  

For example, say you’ve been receiving $13,250 annually. You’ll have to repay $94,556, but your yearly benefit would rise by $7,443 to $20,693. You’d recoup your initial outlay just before you turn 83.

Moreover, you’re not required to pay any interest on the benefits you’ve already received. “That’s the key,” says Larry Kotlikoff, professor of economics at Boston University. Paying back the government and restarting your Social Security is similar to purchasing an annuity—spending a sum of money now for guaranteed income in the future. However, because you don’t have to repay interest on the benefits you’ve received, and there are no fees, this tends to be less expensive than buying an annuity.

And yes, this is perfectly legal, according to Mickie Douglas, spokeswoman for the Social Security Administration. To start the process, you file a Request for Withdrawal of Application, Form SSA-521. You can download the form from the SSA website (www.ssa.gov) or pick it up at your local office. The Social Security Administration routinely approves such requests, says Douglas. Your next step is to reapply for Social Security benefits based, of course, on your current age.

Social Security officials say that between January and late April of this year, 71 people filled out Form 521, although Social Security doesn’t track the reasons why people filed the requests. It’s likely that most applicants have been retirees who drew Social Security benefits, then decided to go back to work, Kotlikoff says.

The calculations work out most favorably for people between the ages of about 68 and 72 (see chart above). Doing the do-over earlier brings a smaller increase in Social Security payments. However, the longer you wait, the larger the amount of benefits you’ll need to repay, which means it will take longer to recover your investment—and that depends on how long you live.  

If the payback option appeals to you, consider this: First, you need to come up with the cash to pay back the Social Security benefits you’ve already collected. As with any annuity purchase, you’re also taking a chance that you’ll live long enough to recoup the amount you initially pay. Also, since Social Security dies with you and your spouse (if you have a spousal benefit), you don’t have the option of leaving it to your heirs.

Finally, Congress may decide to change the law and eliminate this option, which some consider a loophole for the well-off, who are most able to afford the payback. “This runs counter to the spirit of Social Security,” says Alicia Munnell, director of the Center for Retirement Research at Boston College.

Michael Kitces, a certified financial planner and director of financial planning for Pinnacle Advisory Group in Columbia, Md., says that because of the tax impact, seniors who can reasonably expect to live a long time may be better off simply delaying the start of their Social Security payments.

Even so, paying back Social Security may work for those who took early retirement at least several years ago and now are mulling over the purchase of an annuity. “Analyze this option,” he says. “For some, this could be a pretty good deal.”