In recent years, a little-known strategy of withdrawing from and reapplying for Social Security retirement benefits has been receiving increasing attention. So much, in fact, that it looks like the Federal government’s Office of Management and Budget may soon be shutting the strategy down for good. However, the impact may not actually be very significant after all!
The withdraw-and-reapply Social Security strategy was first discussed on this blog over 2.5 years ago. And since that time, articles have proliferated all over both the industry and consumer media explaining the strategy; in fact, it was also covered in the November 2009 issue of The Kitces Report, and the aforementioned blog post itself has been read over 10,000 times!
Unfortunately, though, the strategy may have become a little too popular. As an article in Kiplinger’s pointed out this past August, the Federal government’s Office of Management and Budget is considering a new rule which would effectively end the availability (and usefulness) of the existing strategy in most situations, by restricting a withdrawal and reapplication for benefits to be available only within the first 12 months after a Social Security recipient first begins to receive benefits. In practice, this would revert the withdrawal and reapplication approach from a "strategy" to be completed anytime to simply a way for someone who just started benefits to change his/her mind.
However, the Kiplinger’s article includes another very interesting note. In 2007 – before the strategy was widely known – 500 people went through the withdraw, payback, and reapply process for Social Security benefits. After the strategy went through a virtual explosion in consumer and industry media discussion, the number of people engaging in the strategy by 2009 had… doubled. So if there were 500 people completing the process in 2007, there were approximately 1,000 doing it in 2009. And accordingly to the Kiplinger’s article, this is out of an estimated 37 million people receiving Social Security retirement benefits!
So apparently, not withstanding all the furor of discussion about considering the withdrawal and reapplication strategy, apparently hardly anyone is actually doing it! After all, as mentioned earlier, this blog’s own post on the Social Security strategy has been read 10,000 times in 2.5 years… yet only 500 more people were actually completing the process in 2009 than 2007!?
So why aren’t more people filling that Form SSA-521 for withdrawal of application and then reapplying for their Social Security retirement benefits? It’s not for a lack of appeal for the client with an eye on the long-term value of the strategy; as I have written in the past in both this blog and in prior newsletters, for those clients who live significantly beyond their life expectancy, this Social Security strategy will represent one of the best investments they’ll ever make. And it "performs" best when the client lives a very, very long time, or when there is significant inflation (since the reset-to-a-higher-level benefits still enjoy the Social Security cost-of-living adjustment annually), which are the exact times that you’d want the strategy to work.
So I can only presume that the inhibitors to the strategy are something else. Perhaps, in the end, clients still fear a strategy that is analogous to an annuity, with similar investment characteristics – a tremendous value if you live a long time, but a significant financial loss if you pass away shortly after making that lump sum repayment of benefits. So to the extent that clients are often fearful to buy immediate annuities, perhaps they’re afraid to do a Social Security payback as well. In addition, as was shown in the prior post on this blog, the value of the strategy declines rapidly once the individual passes age 70, so perhaps many retirees are discovering the strategy "too late" to be feasible anyway. And it is also likely true that for many Social Security recipients, the strategy is not feasible simply because the individual or couple can’t afford the lump sum (often as much as $100,000) required to complete the repayment in the first place; nonetheless, that doesn’t entirely explain why 36.999 million out of 37 million Social Security retirement recipients don’t elect to try the strategy. On the other hand, for most clients of financial planners – who tend to have a higher average wealth than the average American – the strategy still seems to be popular as a point of discussion (we all like to have choices to consider), but not as an actual strategy to implement.
In point of fact, given how little the strategy is actually being used, one has to wonder why the Office of Management and Budget (OMB) feels the need to close this "loophole" anyway. Perhaps the reason has less to do with the direct financial ramifications of the strategy, and more to the administrative impact for the Federal government’s operation of Social Security. After all, given the number of inquiries to financial planners and the times this blog’s own discussion about the strategy has been read, I can only presume that the Social Security Administration itself has been inundated with requests for information and estimates of the payback cost and increased benefit amount. And given that the strategy actually isn’t being used very much, perhaps OMB believes that it will provide significant administrative relief to the agency to eliminate the strategy (so people stop asking so many questions about it!) while having very little actual impact on the 99.99%+ of Social Security recipients who haven’t opted to do it anyway.
Nonetheless, if you or your client are still considering a Social Security reset, now is the time to get it done. As the Kiplinger’s article pointed out back in August, the new rule ending the widespread availability of the withdrawal-and-reapplication strategy could take effect "within a few months" – and that was printed over 2 months ago! So there may not be much time left!
What do you think about the change? Have you had clients asking about this strategy? Have you actually gone through with it for any clients?