The proverbial writing has been on the wall for a while, but now it’s official: the Social Security withdraw-and-reapply strategy will no longer be available, except under relatively limited circumstances. On the plus side, though, it appears that the strategy has been far more hype than actual value, and the number of people directly affected should be very minimal.
The Social Security withdraw-and-reapply strategy was first discussed on this blog almost 3 years ago. The basic approach is relatively straightforward – if you have been received Social Security benefits, you can choose to pay back all prior benefits received, and reapply at your current age, adjusting all future benefits to be anchored to that new starting age (which means you may reduce any early retirement reductions that originally applied, or benefit from delayed retirement credits due to your new later start age). The repayment of prior benefits occurred without adjusting the amount for interest, which meant in practice the Federal government effectively loaned you the funds interest-free for a number of months or years, and then you paid back your interest-free loan and reapplied to get whatever higher benefit you may have wanted. Viewed another way, the strategy was the equivalent of paying a lump sum (the repayment of prior benefits) in exchange for an inflation-adjusted lifetime annuity (your higher future Social Security benefits), and as the math worked out, you could get a pretty spectacular return on that annuity if you lived a long life.
Media coverage of the withdraw and reapply strategy has created a tremendous amount of hubbub over the past several years, as it has been covered by many popular personal finance writers ranging from syndicated columnist Scott Burns to Kiplinger’s Mary Beth Franklin. In fact, the strategy was also covered by yours-truly in a 2009 issue of The Kitces Report! However, the active discussion of the withdraw and reapply strategy appears to have been more buzz than action; the Federal Office of Management and Budget estimates that approximately 500 people were taking advantage of the strategy in 2007, and with all the media buzz of recent years, that number had risen to a whopping 1,000 people who withdrew and reapplied in 2009. Out of approximately 37 million Social Security recipients!
Nonetheless, the apparent burden on Social Security offices dealing with the volume of requests has been significant, even if the actual number of Form SSA-521 filings has been negligible. In addition, the Social Security Administration acknowledges that it’s probably not in the interests of maintaining the Social Security Trust Fund to continue to allow interest-free loans, especially when the strategy in practice can only be utilized for “relatively” affluent individuals who have the financial wherewithal to pay back a large chunk of prior Social Security benefits – potentially more than $100,000 in a lump sum.
So after warning a few months ago that the strategy might be shut down, the Social Security Administration published its official announcement in the Federal Register last week. The biggest change: effective immediately, you can only withdraw and reapply for Social Security within 12 months of when benefits began. So on a prospective basis, the time window for taking that “interest free loan” from the Federal government is limited; and for those who already began benefits in the past, if it’s been more than 12 months, then the withdraw option is no longer on the table for you anymore (if you had previously taken early benefits more than 12 months ago in anticipation of applying this strategy, it would unfortunately appear that it’s too late for you to withdraw now!).
The Social Security Administration picked the 12-month window by noting that most withdraw-and-reapply elections (approximately 85-90 percent) occur in this time window anyway (which means of the 1000 withdraw-and-reapply applications in 2009, apparently not much more than 100 of them actually involved a “big” payback and significant adjustment in benefits!). And those who end out going back to work beyond the 12 month window technically don’t need to withdraw from benefits anyway; if you began benefits before normal retirement age, and your benefits are reduced by work under the Social Security Earnings Test, the future benefits are increased anyway to the extent that you don’t receive current benefits. Thus, it would appear that the only people affected are those few who wish to withdraw and reapply beyond the 12-month window just to enjoy a big payback of an interest-free loan: which is the exact group that the Social Security Administration wanted to slow down.
Notably, the new rules apply only to the “old age” retirement benefits; there has been no change to how disability and survivor benefits work (where theoretically a withdraw-and-reapply process might still be done), as the Social Security Administration observes that the strategy is hardly ever used for those types of benefits anyway. And if those groups do begin to withdraw and reapply excessively, it appears probable that the Social Security Administration may simply intervene at that time to close the strategy down for those groups as well.
In any event, as I’ve written in the past, it appears that the Social Security withdraw-and-reapply strategy has been more hype than action for a long time. And while it’s always nice to have choices of available strategies, in appears that in reality, all we’re losing with the Social Security Administration’s change is access to a strategy that only 0.0003% (approximately 100 out of 37 million) of Social Security recipients were using for more than 12-months’ worth of benefits anyway.
So what do you think? Were you actually using this strategy with any of your clients? Are any of your clients materially impacted by the change?