Did You Sign Up for Social Security Too Soon?

It seems to me there are two ways to look at this:

First, you're essentially getting an interest free loan from Social Security. If you invested you Social Security benefits from ages 62-67 to earn interest but had to repay them without any adjustment for interest, then the extra money is yours. A typical retiree gets around $1,000 per month; from age 62-66 this total around $64,000 in nominal terms (including annual COLAs). If you invested this amount at 3% above inflation, your total at age 67 would be around $68,000, so effectively you would have made $4,000 on the transaction. This isn't a huge amount of money, but it's effectively free money. That said, this aspect of the Social Security law was most likely unintentional. So if a lot of people did it Congress would likely require that beneficiaries repay with interest, in which case it's no longer a good deal.

Second, and probably more importantly, this provision gives people the chance to "buy" more of the Social Security annuity, which can be quite valuable because it's adjusted to inflation and offered on better terms than private annuities. Let's say you claimed at 62 and at age 67 you had both a Social Security benefit and some additional savings (IRA, 401(k), etc). By 'repaying' your benefits from 62 through 66 you'd effectively be buying a higher Social Security payment. The cost would be a lot less than if you took that money from your IRA or 401(k) and went to an insurance company to buy an annuity with a similar annual payment. Annuities provide a lot of protection against outliving your assets and so can be valuable even to people who don't expect to live a long time. (Unless you KNOW you'll die at a given age there's still a lot of uncertainty, and annuities protect against that.) This second aspect of the issue may be the more important one, since it's probably a good deal even if the rules were changed to require repayment with interest.

Andrew Biggs

http://andrewgbiggs.blogspot.com/

Andrew Biggs of VA 12:33PM April 13, 2008