When to Start Collecting Social Security, Revisited

Today is the first anniversary of the posting of one of my few evergreen items, When to Start Collecting Social Security. Coincidentally, just yesterday ISocialSecurityposter2 came across an item in Smart Money that made me realize I needed to update my analysis to include an interesting wrinkle in the Social Security rules.

To recap, a person is allowed to decide when to start drawing Social Security payments from the government. You can get them at 62, at 70, or anyplace in between. There is an obvious attraction to getting it sooner rather than later, and about 45% of those eligible choose to start getting the checks on their 62nd birthday.

The reason that the other 55% hold off is that the older you are when you start, the bigger the checks become. The payments for a person starting at 70 are about 70% higher than for a person starting at 62. (But relatively few hold out all the way until 70. The median age is 63.)

That trade-off, forgoing some years of payments to make the size of those payments bigger, sets up an interesting little finance problem which I discussed a year ago with the help of some annuity prices I found on-line. (It’s a good post. Here’s another link.)

The main conclusion from my analysis was that, unless you know you are likely to shuffle off your mortal coil earlier than actuarially expected, you should hold out until age 70. In other words, most Americans get this wrong.

But with the addition of a tidbit from the Smart Money article, I now realize that there is a good argument for starting at 62. I’ve known for a while that 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.

The Smart Money article refers to this, in passing at the very end, as an interest-free loan from the government. I can’t remember a more deeply buried lead.

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 Smart Money piece does acknowledge this strategy, briefly, only to warn readers away from it. The objection, and it is not unreasonable, is that it relies on the government not changing the rules in the future. There is no guarantee that the Social Security Administration will always allow this interest-free loan option, so taking checks starting at 62 on the assumption you can pay it all back at 70 might be dangerous.

Anything is possible, and there is no question that this particular feature of the Social Security rules costs the government money it badly needs. But logic and reasonableness are not particularly useful when trying to predict government action. Reducing benefits for seniors is always a political challenge, and this is a government that could not bring itself to reinstate an estate tax for 2010.

Moreover, although it certainly costs the system money over time, it is one of those things that helps the current cash flow at the expense of the future. 70-year-olds hand over a pile of money in exchange for a modest monthly sum for the rest of their lives. The fact that this is a terrible deal for the government,  that the sums coming in do not justify the sums that will have to go out in the future is not the sort of thing that usually goes into the political calculus. In the short run, that is, before the next election or two, allowing seniors to reset makes the deficit smaller.

And finally, even if this loophole were closed, it would likely not be closed retroactively. Folks who started getting checks at 62 would probably have a grace period to hurry up and file to change that to 70 before the option went away.

So I will cautiously amend my advice from a year ago. The payments you get at 70 are still the best deal going, but if you can manage the risks involved, you might just be able to have it both ways. Get checks starting at 62 and then start over at 70.

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