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 I 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.

Government, Media | Frank Curmudgeon | July 20, 2010 11:59 am

15 Comments

By Craig, July 20, 2010 @ 12:21 pm

So, what’s been going on, anyway? You just got an itch to do a little blogging here, or are you back to stay until further notice? Maybe you picked up Citi in the basement, turned around and shorted BP before Deepwater, and now you’re just killing some time while you try to decide which Greek island to buy?
By The Head Hunter, July 20, 2010 @ 1:04 pm

Sweet, I can’t wait to exploit that!!! In 40 years…
By Adam, July 20, 2010 @ 2:04 pm

Really interesting piece…seems ridiculous that you can pay it back without any interest being charged to reset it. Take the money at 62, invest it, pay back the principal at 70 and collect bigger checks plus whatever you made on the 8 years before!
By Steve, July 20, 2010 @ 2:30 pm

It is an odd loophole. The whole social security system is a morass of quirks and odd interactions. As someone else commented on the original post, it’s possible to end up with a marginal tax rate of 65% or higher if you do things wrong.
By Mr.GoTo, July 20, 2010 @ 2:46 pm

The SSA considers this to be a “loophole” and is working to close it. When it happens, I don’t believe those who claimed early will be grandfathered because there will be no sympathy for those who started off planning to “exploit” the loophole.
By Dangerman, July 20, 2010 @ 2:47 pm

It’s weird how this topic pops up on the personal finance blogs every so often – seems Scott Burns was the first to popularize it back in 2008 in “Spend Till the End.”
By jcompton, July 20, 2010 @ 4:53 pm

The other argument against is that I have seen repeated anecdotal evidence that the SSA has a really, really hard time actually processing the payback-and-reset paperwork correctly. So you may want to work into the calculations the value of your time to spend your 70th year arguing your case with various levels of the SSA hierarchy.
By Patrick, July 20, 2010 @ 6:11 pm

Uh, so what’s the worst-case scenario here? The government changes the rules, and you’re forced to keep 8 years of income that you had planned to give back?
By Investor Junkie, July 20, 2010 @ 10:32 pm

Hmm wasn’t the idea of SS was it was YOUR money? If you take the money, and give it back to the government why should I have to pay interest?
By DanT, July 21, 2010 @ 10:58 am

Any reason you couldn’t reset each year between 63 and 70? Is there a limit of one reset per lifetime? If you could reset annually, you would be upping your payout each year, as well as hedging against the possibility of the loophole being closed. Not to mention earning more interest on those payouts in the meantime.
By Steve, July 21, 2010 @ 1:38 pm

I think I read that the reset is a one time deal.
By Frank Curmudgeon, July 21, 2010 @ 6:16 pm

Craig: I’m back indefinitely, which means until higher priority projects crowd this one out again. Sadly, I picked GS over Citi, so even though they are undoubtly on sale, Greek islands are still not in the budget.
By Andrew Stevens, July 22, 2010 @ 1:45 pm

You weren’t correct in your original argument anyway. The SSA sets the amount of money paid out to be actuarially equivalent for the average person. This is very surprising actually. As you said, waiting longer seems to be the intuitive answer, but it’s not, by design, actually the correct answer. The SSA is, in theory, indifferent to when you start collecting benefits. You mentioned in the article that you had ignored the possibility that a 62 year old won’t live to age 70 and then dismissed that as not worth considering. 14% of 62 year olds won’t live to age 70. That’s an awful lot of people who won’t get any benefits at all because they waited until they were dead if everybody employed your suggested strategy.

If you’re male and not in good health, you should absolutely start collecting at 62 if you’re no longer working. (If you can work, you are always better off continuing to work until full retirement age, of course.) If you’re female and in good health, you should probably wait.

Note that married couples have a whole different strategy they can employ since a surviving spouse can stop taking their own benefits and start taking their dead spouse’s spousal benefits if those are higher. This often leads to a 62/70 split strategy with the lower income spouse (often a younger wife with a longer life expectancy) taking benefits at 62 and the husband delaying until age 70, thus increasing the spousal benefit available to his wife.
By Mark Wolfinger, July 22, 2010 @ 5:51 pm

In you collect at age 62, save every penny, and earn a 7% compounded return, you are always better off than starting at age 70. there is no future date at which the older starter ever has as much cash as the early starter.

That idea was viable. Now 7% is a difficult goal.
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