More Social Security Back Doors

I previously discussed a loophole in the Social Security law that allows current retirees to pay back the benefits they’ve received (without interest) and restart the Social Security clock at a higher benefit level. Recently, I discovered two additional unusual Social Security strategies.

Boston College maintains a Center for Retirement Research that publishes all sorts of interesting working papers and studies about retirement.  Recently, the center published a short worksheet discussing three Social Security strategies that it dubbed “Strange, but True.”

The first item is the scheme that I discussed back in May; it arises from a loophole that could be closed at any time.  The idea is that after receiving Social Security benefits for several years, a retiree can pay back all the benefits received based on an earlier retirement age and then qualify to receive a higher level of benefits for the rest of his life.  This rule arose from a 1957 case in which a woman began taking Social Security benefits but continued to work and pay FICA.  After several years, she was given permission to repay her benefits and re-file on the basis of her new work history and age.  Presently the SSA is willing to apply this ruling rather liberally, so that even a person who has not worked for several years can refile purely on the basis of being older.

The other two strategies result from deliberate legistlative changes made through the Senior Citizens’ Freedom to Work Act of 2000.  Both changes were made as incentives to encourage Social Security-eligible folks to stay in the work force, and both involve the spousal benefit.  If a husband and wife both have a work history, each is entitled to collect either a benefit based on his/her work history or a spousal benefit based on the spouse’s work history.  Only the larger of the two benefits may be taken at a time, not both.  Once a worker has retired, his or her spouse may claim a spousal benefit.  If both have reached full retirement age, the spousal benefit is equal to half of the worker’s benefit.

It’s now possible for a person to first claim a spousal benefit at full retirement age and then later claim his own benefit.  This could be important if one spouse is older than the other and wishes to retire first.  This approach would provide added income only if the spousal benefit recipient has the potential to eventually claim a personal benefit that’s larger than the spousal benefit.  The strategy has no obvious downside; if the spouse is able to keep working and collect a spousal benefit anyway, it amounts to “free” money.

The second strategy seems really unusual in that it permits a worker to file for benefits and then immediately suspend the filing.  The initial filing allows the worker’s spouse to file for spousal benefits.  The suspension allows the worker to continue working and eventually qualify for a higher benefit based on age and work history at some point in the future.  There is a risk with this strategy: it could result in a smaller total Social Security benefit for the household if the spouse who files and then suspends happens to die earlier than expected.

Personally, I can’t help thinking that the first strategy amounts to gaming the Social Security system; it tends to benefit those with significant resources, because they are the only ones who can afford to pay back several years of benefits.  The Social Security system wasn’t intended to be a source of interest-free loans, but that’s what the loophole allows.

The other two strategies are deliberate attempts to encourage older people to stay in the workforce longer; these rules are less likely to be curtailed and seem more reasonable to me.  Married couples considering retirement options should certainly be aware of these strategies.

About the author

Thomas Fisher, CFP®
Thomas Fisher, CFP®

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