Free loans cost Social Security billions
Did you know that you could get a free loan from Social Security? I didn’t, but this is a strategy worth tucking away and considering at retirement time. Boston College’s Center for Retirement Research says that the government pension program is indeed in the business of giving out free loans, mostly to well-off retirees. What’s more, the center calculates, the free loans cost the government between $5.5 billion and $11 billion a year.
Here’s how the strategy works. You start collecting benefits at age 62, and then at age 70 — when everyone’s benefit maxes out — you tell Uncle Sugar that you want to refile. You’re required to pay back all the benefits you’ve collected over those eight years, but you’re not required to pay any interest.
If you can afford to put all the money in a bank account, you come out ahead by the amount of interest you earn. Compared with waiting until age 70 to claim benefits, this is a can’t-lose strategy (although, if you die shortly after turning 70, your heirs might wish you hadn’t repaid the “loan.”)
Of course, few low-income retirees will be able to pull off this strategy. They need the money for living expenses. So this little-known aspect of Social Security law is poor social policy, authors Alicia H. Munnell, Alex Golub-Sass and Nadia Karamcheva argue:
… the “”Free Loan from Social Security” strategy creates more inequity between those who can afford their retirement and those who are at risk of not being financially prepared to retire. … Social Security was not designed to give zero-interest loans to those who can afford to retire without their monthly benefit.
(2 votes, average: 4.5 out of 5)
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
This “loan” is not as free as it sounds. Wealthy Social Security recipients pay income taxes on most of their benefits. When they re-pay their “loan” they don’t get the taxes back. So if you put all the Social Security benefits in the bank between age 62 to age 70, the interest earned still doesn’t exceed the amount of tax paid. Even if you go back and amend the tax returns you can only go back three years so you forfeit the tax on several years.
scityparent,
if what you say is true, excellent analysis and you’re very alert. The article mentions nothing of this important item you mention and if true, then the article should not even have existed as it would be useless.
David Nicklaus, how about talking about something with Soc. Security I’m more mad at the government about and that’s where people who never worked here a day in their lives get Medicare and Social Security benefits, but they came to the US from other countries at our retirement age. This is not disability payments, either. Thank you, Uncle Sam!!!
Actually, Dan S1, that’s not true. Social Security retirement requires a person to be “fully insured”, meaning a person has to have worked in this country to be entitled to benefits. For most people to be fully insured, they must have 40 quarters of coverage at retirement age, or a minimum of 10 years of work.
Dan S1 has been reading too many right wing blogs where they claim so many things which are untrue but they fit ther beliefs so they believe them. I am liberal (and proud of it) but never accept anything I read especially on the internet until I have fully checked it out. Both articles which meets my position and those which don’t.
These free loans are another example of top down philosphy where the folks on the top of the pecking order give the most to the politians and receive the most in return. these are also the same folks who complain the most about government spending. Go figure.
The tax implications of repayment of Social Security benefits are discussed in IRS Publication 915, page 15. Unlike other tax return amendments, one does not file an amended tax return and is not limited to the past three years.
Let’s see, how much interest is earned on the maximim SS benifit at the 2.5% currently paid on CD’s? This seems to be more trouble that its worth and if only rich guys can afford it, they likely lose that much loose change over that time
What the column does not mention is that after returning, say $200,000, to the Government at age 70, I would no longer earn any interest on that amount of money. For that year I would earn interest only on my annual payment starting then. It would take a long time to catch up.
Is there on some type of on-line calculator to better examine and evaluate this possibility on a more personal level???
In answer to stlobsvr, here’s what you can do. First, recognize that Social Security is essentially a “immediate payment” annuity, but that it is better than most in that its benefits are linked to inflation.
Now, find what you would need to pay to an insurance company to purchase an inflation-linked immediate payment annuity, at age 70, to raise your total income from that plus your existing Social Security benefits, to the level of future Social Security benefit payments you would receive by paying back your previous benefits to Social Security. That would indicate whether purchasing additional future payments from the Social Security system or from a private insuror would be a better deal for you. (Of course, the better deal for you is the worse deal for U.S. taxpayers as a whole!)