Executive Summary
You have an appointment with a client who has already elected Social Security and now realizes he has made a mistake. Whether because he didn’t think about how his election would affect his spouse, or he was unaware of the options, or for some other reason, he has now changed his mind. What are his options?
While the so-called "Social Security withdraw and reapply" option is mostly gone as a strategy, there are actually still several ways to "undo" benefits, including choosing to pay back benefits within the first 12 months, going back to work to deliberately cause the Social Security Earnings Test to apply, voluntarily suspend benefits after full retirement age, or adjust the timing that a spouse starts benefits.
The Old Withdraw And Reapply Strategy
Under the old rules, you could file early, at 62 for example, and take reduced benefits all the way to 70. Then at 70 you could turn around, pay back all the benefits, and re-file for a higher benefit as though you had “delayed” claiming. Essentially, it equated to an interest-free loan from the government (using the benefits from age 62 to age 70, before paying them back), which the Center for Retirement Research at Boston College estimated could cost the Social Security system somewhere between $5.5 and $8.7 billion. Further, the “interest free loan” served no social purpose.
Consequently, the Social Security Administration changed the provision in December 2010, limiting the pay-back option to only being available within the first year after benefits are elected. But that doesn't mean your clients can no longer fix a mistake. Social Security recipients still have four options for changing or altering their benefits once they elect.
Option 1: Pay It Back
If the client changes his mind within the first 12 months of electing benefits, he can still file SSA Form 521 to withdraw (i.e., "undo") the original Social Security application, and pay back any benefits. If benefits were received by auxiliaries, such as a spouse or children, those benefits would also need to be repaid.
Once benefits have been repaid, the individual is treated as though he/she never elected to start benefits, which means he/she will not receive an actuarial reduction due to the original filing. Subsequently, that individual can apply for benefits again in the future - with an age-appropriate adjustment at that time - or can file a restricted application for spousal benefits.
Option 2: Go Back to Work
If the client is outside the 12-month window and decides he/she wants to go back to work between the ages of 62 and Full Retirement Age (FRA), benefits will be subject to an Earnings Test. The 2012 earnings test exempt amount is $14,640 ($38,880 in the year the client turns FRA). Social Security will withhold $1 in benefits for every $2 of earnings in excess of that amount, potentially reducing benefits all the way to $0. However, it's important to understand that this is not a tax! In fact, it can be helpful!
For instance, let’s say your client elected benefits at 62 and was receiving an $1,800 monthly benefit (75% of $2,400) and now wants to go back to work at 63 earning $90,000 per year. $90,000 - $14,640 is $75,360. Divide that by two and the earning penalty would be $37,680. Since that is greater than the total Social Security benefit of $21,600, the client would not receive any Social Security benefits for this period.
However, this “earnings penalty” is not a tax, because in reality Social Security would adjust the reduction on this client’s benefits for each month in which he didn’t receive a check due to the Earnings Test. If this client actually received benefits for the 12 months he was 62, but then worked and did not receive any further benefits until age 66, SSA would go back to his record and adjust his benefit upwards. They will treat it as if he had originally elected benefits only 12 months early (since he only received 12 months of early benefits), which would be the equivalent of starting at age 65 instead of 62; accordingly, the individual's monthly benefit would be adjusted upwards to $2,240 (the adjustment for 3 years of early benefits that weren't actually reduced early!) plus any Cost of Living Adjustments that had accrued.
Option 3: Voluntarily Suspend
There is another option for those who don’t want to go back to work. Once the client reaches FRA, it's possible to voluntarily suspend benefits. The client simply needs to call or visit a Social Security office and request a voluntary suspension. It's even possible to call in advance of FRA with instructions to suspend at FRA.
Here’s where it gets interesting, as we follow the math. By electing at age 62, the client basically reduced monthly benefit to 75% of what would have been received if elected at FRA. By suspending benefits at age 66, though, the monthly benefit will increase by 8% per year until age 70, for a total of 32%, as the client earns delayed retirement credits because benefits aren't being paid. And notably, if you increase 75% (the original reduced benefit) by 32% (the delayed retirement credits increase) you get 99% (.75 x 1.32 = .99). In other words, you can take Social Security from 62-66, suspend from 66-70, start again at age 70, and still get 99% of the benefit you would have gotten had you simply waited until full retirement age in the first place!
This should not be viewed as a claiming strategy, only as a means for minimizing the damage of a "mistake" where the client has had a change of mind after already starting benefits early. There are several reasons one wouldn’t want to elect at 62 with the intent of suspending at FRA. First, if the client dies between 62 and FRA, the widow/widower would be permanently stuck with a substantially reduced benefit. Second, the client would forfeit any future option of claiming a restricted spousal benefit, because once you file for your own benefit, even if it is in suspension, your spousal benefit is reduced as if you were actually receiving your benefit. If your own suspended benefit is higher than your spousal benefit, you will not receive a spousal benefit at all.
Option 4: Maximize Benefits for your Spouse who has not yet elected.
Even if one member of the couple has already started Social Security benefits, the reality is that there are still multiple claiming strategies available to decide when the remaining member of the couple should start benefits, including starting early, at full retirement age, delaying until age 70, or filing a restricted application to start spousal benefits but delay personal benefits.
Conclusion
Though it almost always pays for at least one member of a married couple to delay benefits, almost 75% of beneficiaries elect Social Security between age 62 and FRA. You’re going to run into clients who regret this decision or simply had a change of plans. Helping them navigate the different options for making a change is a great way to add value and make sure your clients are making the best decision. Social Security Timing® can help you find the best option.
Thanks, Joe and Michael. This was a great blog post. I have a question about one of your paragraphs.
“Second, the client would forfeit any future option of claiming a restricted spousal benefit, because once you file for your own benefit, even if it is in suspension, your spousal benefit is reduced as if you were actually receiving your benefit. If your own suspended benefit is higher than your spousal benefit, you will not receive a spousal benefit at all.”
So if a husband files for reduced benefits at 62 and then files a restricted application to claim on his wife’s record at FRA, his payment will remain reduced (assuming he’s able to receive spousal benefits in the first place). If that’s correct, then isn’t he only forfeiting his future option of claiming a *full* restricted spousal benefit? I know this seems like a minor point but I’ve found that everything dealing with SS seems to be a minor point that makes a big difference.
Also, what about the converse case: A husband files at 62. The wife, at FRA, files a restricted application and receives the spousal benefit. I don’t believe her benefit is reduced in spite of the fact that the husband filed early. Is that correct?
To question #1 – The point of the paragraph was not that he gives up all rights to a spousal benefit. Instead, he gives up all rights to file restricted for only a spousal benefit. The difference is substantial. For example, if both he and his wife were the same age, and his benefit at FRA was $2,000, but he filed at 62, he would recieve $1,500 of benefits. If he suspended that benefit at 66, he would not get any spousal benefit at all because the greater of his PIA or benefit amount is greater than 50% of his wifes PIA.
The only way he could access a spousal benefit at all would be to file a restricted application, which he can only do if he has not yet filed for his own benefit.
To the second question, you are correct – her spousal benefit is based off his PIA, not his actual benefit amount.
Hope that helps!
As stated in the article…Should he file the SSA 521 form and “pay back” the income received in the first twelve months he can, at FRA (66 in my case), file a restricted spousal benefit for 50% of his wife’s SS. I am in the process of doing so and will at my FRA receive an additional $34K roughly from age 66 – 70 in the form of the spousal benefit all the while receiving the delay credits until age 70. Whether it is or not, it feels like a “free lunch” in a world where there are few.
Additionally the tax implications of SS are much more favorable in the long term. With us the “break even” analysis doesn’t come into play. What does is the peace of mind that comes from…
1. Spousal security of having the higher amount should I pass first (my wife has longevity in her family of 100+ relatives)
2. The inflation indexed annuity effect of combined SS that covers 85% of our imperative expenses.
3. Lower tax burdens after age 70
The $34K spousal benefit is simply “icing on the cake”. We will spend 20% of our combined IRA’s to purchase a 8 year bridge annuity to cover the shortfall using the higher (age 70) annual SS amount as our replacement #. This will give us an increased income stream during those years while our health remains good and travel is not a burden.
We are considering increasing our equity allocation from 50% to 65% to take the benefit of this “security”.There again, Michael’s latest research on an escalating equities glide path has thrown a new twist into consideration. We may simply adjust upward 1% a year.
Michael, thanks for your insights.
Jon