Business

Should you reapply to Social Security?

By Don Askey
Money Matters
Published: March 25, 2008

"What do you know about reapplying to Social Security?" my 67-year-old friend asked me. I honestly admitted I'd never run into the question before and would have to give some thought to the question.

I learned that a fellow named Scott Burns, a journalist who writes on personal financial questions in newspapers and online, has recently published his opinions on the subject of reapplication, especially for those in their late 60s and early 70s, who started receiving their Social Security benefits at age 62.

His thesis is this: You cannot find a better annuity anywhere than the annuity you'd receive for life from Social Security given its annual adjustments for inflation. On this point Burns is correct, though there are some commercial products that come close and may be more flexible and more appropriate for some, depending on their objectives. Also, the taxation on the distribution from an immediate commercial annuity is typically lower in most cases than the taxation on Social Security benefits.

Burns calculates that if a 68-year-old individual who had taken Social Security since age 62 were to repay all of his Social Security payments for the last six years to Social Security and reapply for benefits, he would receive the equivalent of a lifetime annuity paying 9.5 percent per year with adjustments for inflation. That kind of annuity payout is not available commercially from any private insurance company.

In the one case I studied the current Social Security recipient would have to repay to Social Security $125,000 to $150,000 to get the 9.5 percent lifetime benefit.

Returning $125,000 or more to Social Security raises questions about the best use of your money and about your assumptions, especially life expectancy. You have to live at least another 10 years to get your money back. If you died within 10 years, you would have forfeited all of the capital and denied heirs any access to the "unused" funds.

Returning money to Social Security in this case assumes that the inflation adjustment will continue and that current taxation on Social Security benefits will remain unchanged. What if Congress in an effort to resolve some of the federal government's deficit problems decides to means test Social Security benefits and adopt more aggressive rates of taxation for those with other sources of income or higher benefits?

And the taxes you already paid on some of your Social Security benefits since age 62? You may be able to file amended returns, but only going back three years.

It is possible to boost your Social Security monthly check by 50 percent to 75 percent by returning six years or more of paid-out benefits. That can be very attractive if your primary financial strategy is to boost guaranteed lifetime income.

Another risk I see to the irrevocable return of money to Social Security is the income-first rule to qualify for Medicaid nursing home benefits. If someone were to elevate her fixed income at the expense of discretionary capital, she may, absent long-term care insurance, risk converting the repayment to Social Security into a higher payment to Medicaid.

Before you send money back to Social Security give careful thought to your objectives and the options you now have. Returning money to the government slams the door on more flexibility and discretion down the road.

Donald E. Askey is a CERTIFIED FINANCIAL PLANNERTM professional and a registered investment adviser with Provident Financial Advisors, located at The Provident Bank in Amesbury (5 Market Street) and Newburyport (66 Storey Avenue), and a registered representative offering securities through Commonwealth Financial Network, member FINRA/SIPC. For your money-related questions write planning@providentfinancialadvisors.com.

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