Social Security Payback Option Eliminated

Retirees will no longer be able to get an interest-free loan from the Social Security trust fund.

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Retirees will no longer be able to get an interest-free loan from the Social Security trust fund, the Social Security Administration announced today. Effective on December 8, retirees will not be able to pay back benefits already received in exchange for higher Social Security payments going forward. Here’s a look at how the new Social Security rules could impact your checks.

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Free loans eliminated. Little-known provisions of Social Security law previously allowed individuals to begin payments at age 62, pay back all the benefits received at age 70 without interest, and then reclaim at a higher rate due to delayed claiming. However, this claiming strategy, which is employed primarily by affluent households, costs the federal government and Social Security trust fund money. “The processing of these withdrawal applications is also a poor use of the agency’s limited administrative resources in a time of fiscal austerity — resources that could be better used to serve the millions of Americans who need Social Security’s services,” says the SSA in a statement. The Center for Retirement Research at Boston College calculated that if all the American workers with enough liquid assets to repay their Social Security benefits utilized this strategy it would cost the system $5.5 billion.

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Under the new rules, Social Security beneficiaries may withdraw an application for retirement benefits only within 12 months of their first Social Security payment and are limited to one withdrawal per lifetime. “There is little to be gained by investing benefits for only 12 months,” notes the SSA in the rule.

Retroactive benefit suspensions discontinued. Another way Social Security beneficiaries were previously allowed to boost their checks was by suspending benefits already received retroactively, repaying the amount received, and then getting higher checks going forward. The new rules allow retirees to voluntarily suspend benefits only for months in which they did not receive payments. Beneficiaries may also suspend future payments beginning the month after the request is made.

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These changes will be applied only to old-age benefit recipients, not survivor and disability beneficiaries. Comments on the new rules will be considered until Feb. 7, 2011. The agency says it will publish a final rule that responds to relevant comments.