IN Daily Opinion/Column

'Reset' Social Security and collect more

Mar 12, 2009 @ 1:26 pm

By Lynn Brenner

Consider recommending a little-known option: pushing the reset button on Social Security.

This monthly benefit can be increased by up to 75% if the retiree repays past benefits and reapplies for Social Security. It’s the equivalent of buying an inflation-adjusted immediate annuity — for about half the cost of a comparable commercial product.

A CHANCE TO START OVER

Clients who took Social Security before their full retirement age accepted a reduced benefit. A person who reached full retirement at 66 but opted to take Social Security at 62, for example, accepted a 25% cut in his benefit. If the benefit at 66 would have been $1,000 a month, at 62 he got $750.

He also passed on the 8% annual bonus he’d have received if he had delayed taking his benefit until age 70 — a four-year annual boost that would have brought his monthly check to $1,320. (In fact, it would be larger; but to keep this simple, Social Security’s annual inflation adjustments have been left out of the equation.)

At 70, he regrets his decision, but he can change it by filing Form 521 to withdraw his original application for benefits and writing the government a check for $72,000 — the $750 a month he has collected for the past eight years. The client won’t be charged interest or penalties. He then reapplies for Social Security and begins collecting $1,320 a month.

The client has gained an extra $6,840 a year in exchange for a $72,000 payment. In effect, it’s an immediate inflation-adjusted annuity whose annual payout starts at 9.5% of his investment. His surviving spouse will continue receiving 100% of the inflation-adjusted monthly benefit after he dies. Furthermore, the U.S. insurer is the world’s most reliable guarantor.

A comparable commercial product is an inflation-adjusted immediate annuity from Malvern, Pa.-based The Vanguard Group, which provides a 4.8% initial payout on a 100% joint and survivor annuity for a 70 year-old man with a 66 year-old wife. (The issuers of Vanguard’s annuity are AIG Life Insurance Co. of Houston and American International Life Assurance Co. of New York. The companies are among the healthy operations American International Group Inc. of New York may be forced to sell as it struggles to raise enough capital to stay alive.)

What about the income taxes the client may have paid on that $72,000 of Social Security benefits he received in the past?

Amended tax returns can only be filed for the past three years. But Social Security recipients who do over their applications get special treatment: When they repay past benefits, they can claim the taxes paid on them going back to 1983 — either as an itemized deduction or as a tax credit, whichever will result in bigger savings (for more information, download Internal Revenue Service Publication 915 at www.irs.gov).

DOWNSIDE

So what are the drawbacks?

Whether or not a Social Security do-over makes sense depends on the client’s age, health, and financial resources.

The older he is, the bigger the premium check he’ll have to write. And the more fragile his health, the greater his need may be to reserve that money for his future medical or nursing care.

“I think this is likelier to appeal to someone who has an ‘Aha’ moment in his mid-60s a year or two after filing for Social Security than to a 70 year-old,” said Christine Fahlund, senior financial planner and vice president at T. Rowe Price Investment Services Inc. in Baltimore.

The decision isn’t reversible. If you pay back $72,000 of past benefits and are hit by a car three days after you begin collecting your new benefit, your family doesn’t get the $72,000 back, says Jane Zanca, a Social Security Administration spokeswoman. On the other hand, your surviving spouse will get 100% of your new, higher benefit as long as he or she lives.

Finally, although the process is simple, it isn’t swift.

After filing Form 521 to withdraw their original Social Security application, clients should be prepared to go without Social Security payments for several months while the agency sorts out the paperwork. During that hiatus, they can expect a bill for their Medicare Part B premiums, which are automatically deducted from Social Security payments.

Lynn Brenner is a weekly columnist on personal finance for Newsday, and has been a business journalist for over 25 years.

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