NCPA - National Center for Policy Analysis


June 4, 2010

An increasing focus on the baby boomer generation's longevity and income risk is leading to a corresponding focus on effective Social Security distribution strategies.  While much is made of the drawbacks of taking payments early on in retirement, a little-known "do-over" provision in the Social Security code, as well as two other provisions related to divorce, is getting significantly more attention, says Investment Advisor. 

Conventional wisdom among financial advisors dictates it's better to wait as long as possible to begin receiving distributions in order to take advantage of higher systematic payments.  The earlier such payments begin, the lower the amount received, sometimes significantly so.  In a poor economy, clients might have little choice but to begin the process as soon as they're eligible.  For those forced to do so, a recalculation provision in the Social Security code can help, says Pam Villarreal, senior policy analyst at the National Center for Policy Analysis. 

  • If an individual retires at age 62 and begins taking their Social Security payments, say at age 65, they can repay the entire amount they've taken over the three years and have their future payments recalculated to receive a higher amount.
  • As an added benefit, they can also take a tax credit for any Social Security benefit tax they've had to pay, or they can take a deduction on the amount of income subject to the benefits tax. 

In theory: 

  • Beneficiaries can begin taking the payments and invest them in conservative instruments.
  • They can then pay back the principal when they reach full retirement age, and pocket the investments' return.
  • They could then take advantage of any tax benefits and re-calculate to the higher amount for the remainder of the distributions.  

"This is an option for many high-net-worth clients, but the obvious drawback is that the money must be repaid," says Villarreal.  "If early distributions were begun by the client, it was probably for a reason, especially in this environment." 

Source: John Sullivan, " 'Do Over' Social Security Repayment Provision Entices Many Retirees; Government code affords a second chance in a tough economy," Investment Advisor, June 3, 2010. 


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