Social Security Administration Seeks to Put an End to Do-Overs

Patience often pays, especially when it comes to Social Security benefits. Sure, you can start collecting Social Security anytime after age 62, but for each year you wait, your payments will increase by 7% or 8%.

"Payments increase about 7% for every year between early retirement age – 62 – and your full retirement age. So if your full retirement age is 65, your payments will increase 7% for each year between 62 and 65, and then an additional 8% for each year between 65 and 70," says Laurence Kotlikoff, a professor of economics at Boston University and co-author of Spend 'Til the End.

For those who can afford it, waiting to tap into Social Security benefits is definitely a more lucrative bet. However, some people are taking advantage of a provision that allows them to earn even more from their Social Security benefits. Called a do-over, the recipient taps into their benefits at age 62 and invests the funds in a safe investment that earns a decent rate of return for several years, then they pay the money back and pocket the interest earned.

Do-overs were included in the Social Security Handbook to allow those who jumped the gun and started taking benefits at age 62 to correct their mistake. All they have to do is file IRS form 521, pay the benefits they've already received back – in full, but with no interest, penalty, or adjustment for inflation – and start taking the larger benefit as if they had waited all along.

Over the last few years, do-overs have become more well known as an investment strategy of sorts. But now the Social Security Administration wants to put a stop to the practice.

"Social Security has sent a proposed regulation to OMB [the Office of Management and Budget] for review that would establish a 12-month time limit for the withdrawal of a retirement benefit application. The proposed regulation would also permit only one withdrawal per lifetime," explains Mark Lassiter, a Social Security Administration spokesperson.

In other words, you'll now have only one year to change your mind and return your benefits, which makes it less of a strategy and more of a way to correct your mistake. One can assume that was the intention of form 521 all along.

Lassiter says the proposed regulation would also affect people who have already taken their benefits, meaning if this was your plan, you're going to want to watch how this situation progresses very carefully. If you miss your opportunity to pay your benefits back – and you've passed your 12-month window – you may be stuck with that low benefit amount for good.

And if you haven't already elected to take your Social Security benefit? My advice remains the same: Hold off for as long as possible, until age 70 if you can, even if it means taking a part-time job or working a little longer. The increase in your benefit amount will be worth it.