The End of Social Security's Interest-Free Loan

Last Updated Dec 9, 2010 10:50 AM EST

Yesterday, the Social Security Administration announced that you'll no longer be allowed to pay back benefits and refile for a higher withdrawal amount if you've been receiving benefits for more than one year. I asked Tiya Lim, who co-authored The Only Guide You'll Ever Need for the Right Financial Plan with me, to explain what this means for you. Here's what she had to say.

The ability to "pay back" Social Security benefits will only be allowed during the first 12 months following the first month of receiving benefits. In addition, the new ruling states that only one withdrawal or "payback" is allowed per lifetime, and the ability to withdraw benefits will only be effective after the month in which the request is made.

Previously, retirees who paid back their Social Security benefits and refiled received higher payments based on delayed retirement credits. For example, if John's full retirement benefit is $1,000, filing early at 62 would give him a reduced monthly benefit of $750. On the other hand, waiting until full retirement age (FRA) would give him $1,000, and waiting until age 70 would give him $1,320 per month. Under the old rules, John could file at age 62, then pay back all benefits received and refile at age 70, which would increase his benefit to $1,320 per month.

The Social Security Administration stated its intentions to revise the withdrawal policy earlier this year after the program was portrayed as an "interest-free loan" from the government. The Center for Retirement Research at Boston College estimated that the payback option cost the Social Security system somewhere between $5.5 and $8.7 billion.

Going forward, you can only take advantage of the payback option if you began taking benefits less than one year ago. The loss of this option makes it more important that you have a tailored Social Security strategy from the beginning.

More on MoneyWatch:
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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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