Second chances, do-overs, re-dos, mulligans – all are great opportunities to correct prior actions that turned out worse than expected. Too bad they are so rare in real life. The Social Security System used to offer us several second chances, dubbing them “Buy-Backs.” To some extent, they still exist, but on a greatly reduced basis. The “good old days” ended in December of 2010, when Buy-Back opportunities were dramatically reduced.
We prefer the term “Pay-Back-and-Restart,” and the opportunity remaining today is best understood by examining the history of the process. Prior to 2010, a Social Security recipient who filed for benefits prior to age 70 could refund the total amount collected prior to the Pay-Back-and-Restart day, and receive the 8% annual (2/3 of 1% monthly) benefit increase credit that was forgone while collecting past benefits.
At any time, immediately or in the future, benefits could be restarted at the increased level. This was allowed as often as time permitted before reaching age 70. Some people exercised their Buy-Back rights annually until their benefits were maxed out due to age.
Under post-2010 rules, Pay-Back-and-Restart remains available, but only once per recipient. Any time within 12 months of the original benefit starting date, a 100% Pay-Back-and-Restart is available. Benefits can then begin any time the recipient wishes to do so, with the full 8% annual benefit increase, plus cost-of-living adjustments. This can be helpful when a recipient decides (after filing) to continue working, or to go back to work. This is a relatively common occurrence, as many people don’t adapt easily to retirement and their new, limited income stream.
Difficulty involved in performing a Buy-Back is commonplace, as 100% of benefit money previously received has to be paid back, and few people actually have that much spare cash. Taking out a loan for the Buy-Back requires accepting longevity risk. The recipient has to live long enough to repay the loan before any increased lifetime benefit is realized.
Suspension of benefits is not the same as Pay-Back-and-Restart, but remains available to most Social Security recipients. Under the rules for Suspensions, a person collecting benefits may shut off the benefit stream for a period of time before restarting (“Start, Stop, Start”). This option is available for recipients who have attained Full Retirement Age, or FRA. During the period of Suspension, the recipient receives a benefit level increase credit equal to 2/3 of 1% for every month in which benefits are not paid. This amounts to 8% annualized, and is available until age 70. For people who have sufficient income at FRA, Start, Stop, Start may enhance lifetime benefits received. Again, longevity is the key, and the risk is borne by the recipients and his or her family.
It is important to understand that after age 70 no further benefit increases are available, except for annual cost-of living (COLA) increases granted across-the-board.
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