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Social Security Limits Do-Overs

Payback option boosted benefits for some but lost money for system

Over the past few years, you may have heard about a strategy in which you could repay — without interest — Social Security benefits you'd received and then reapply for benefits. Because the new round of benefits would start when you were older, your monthly payments would increase.

But the Social Security Administration published new regulations last week that curtails this option.

Now, if you want to suspend your benefits, you must do so within 12 months after first receiving them. According to Social Security, 85 to 90 percent of beneficiaries who withdraw their applications do so within this time frame anyway. The new rules, which became effective Dec. 8, also specify that beneficiaries are limited to one refiling in a lifetime.

An interest-free loan

The do-over strategy, in effect, gave Social Security recipients an interest-free loan. For example, people could file at age 62, invest their benefits until they were ready to repay the amount, pocket the earnings, and then start collecting a larger amount based on their older age. (The size of the benefit continues to rise until age 70.)

A 2009 study by the Center for Retirement Research at Boston College, "Strange but True: Free Loan From Social Security," put the annual cost of the do-over option to the Social Security system at $5.5 billion. Moreover, the strategy was likely to benefit only higher-income seniors, since the benefits received had to be repaid in one — often large — lump sum.

In fact, only a small number of seniors have taken advantage of the option, Social Security spokesman Mark Lassiter says. Slightly more than 1,000 withdrawal applications went through the Social Security system in fiscal 2009, while in the first half of 2010, only 345 people applied.

Nevertheless, the use of the do-over strategy "costs the Social Security Trust Fund the use of money during the period the beneficiary is receiving benefits, with the intent of later withdrawing the application," the Social Security Administration said in announcing the rule change.

"I'm delighted" with the revision, says Kathryn L. Garnett, a Seattle-based life and retirement planner. "I had some concerns about the potential for manipulating the system" when the do-over strategy was allowed.

The Social Security Administration has put the new rules into effect already, but is allowing a 60-day comment period, which ends Feb. 7, 2011. You can comment by going to the federal rule-making portal and using the search function to find docket number SSA-2009-0073.

The SSA "takes seriously all comments," and will make adjustments as appropriate, says Lassiter.

'Claim and suspend' OK

The new ruling doesn't change two strategies that were created under the Senior Citizens Freedom to Work Act of 2000 to let people also receive some benefits while they continued to work. These strategies apply only to married couples, when both spouses have reached full retirement age and have not collected early benefits.

Under what's known as the "claim and suspend" strategy, one spouse claims benefits, then immediately suspends them. This allows the other spouse to collect spousal benefits, while the first spouse's future benefits continue to grow.

Under the second strategy, a husband or wife who has reached full retirement age and whose spouse is already receiving a benefit can claim a spousal benefit while continuing on the job and letting his or her own benefits grow.

Karen M. Kroll is a financial writer based in Minneapolis.

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