Recent Social Security Ruling Limits Income Election Do-Over To 12-Month Window
The Social Security Administration implemented a rule change effective December 8, 2010, placing a time constraint for when people can “re-do” their Social Security Income election. Recipients now have only 12 months from the date they file their income application claim to make an election fix or “re-do.”
So what does this mean for consumers? The difference between a poor Social Security income election and a well-grounded one can be in excess of $100,000 over a couple’s—and even singles’—lifetimes. The total income benefit amount over a couple’s lifetime can approach, and even often exceeds, $1 million dollars.
Social Security’s policy prior to December 8, 2010 provided for an open time window for changing a person’s income election. Individuals who had filed their claim and collected income could repay the income received from the government and then re-file. Not surprisingly, financial research publications and the media caught on to this “loophole” and touted it as an opportunity to secure an interest-free loan from the government.
On the surface, the following excerpt cited from the Federal Register seems to be the primary reason(s) for the rule change: “This “free loan” is not free. It denies the Trust Fund and the Federal Government the use of these monies and the potential returns on the use of those funds. Moreover, the processing of withdrawal applications uses resources that we could use to serve others. Our Nation faces significant challenges resulting from the potential number of future retirees. Current market and economic conditions have exacerbated these challenges.”
Indeed, in the past, probably a handful of people did complete their Social Security income re-dos with the intent to secure an interest-free loan. But many experts suspect the majority of folks who did re-dos and continue to do them within the 12-month time window allowance have done so because, by waiting, their Social Security income benefit increases roughly 6% between age 62 and 66, and 8% between age 66 and 70. Cost-of-living adjustments can also be added to these benefit “bump-ups,” which means increases can potentially range between 9% & 11% per year (note: assuming 3% inflation). For those born between 1943 and 1954, they will receive 100% of their Social Security income benefit at age 66 (source: Social Security).
Also, a number of those re-dos may have been implemented because consumers are becoming savvier about their income election options. Pre-retirees and retirees are living much longer than previous generations. And for a couple considering their Social Security income options, the woman’s life expectancy, on average, is commonly at least several years longer than the male’s. Consequently, a smart Social Security income decision becomes an issue of maximizing both the lifetime income and the spousal survivor benefit.
There are income and spousal survivor planning strategies such as the “File & Suspend” and “Claim Some Now, More Later” techniques that help couples maximize and optimize their Social Security income planning. The Social Security income and survivor benefit is a substantial “gift” that should not be ignored. Also, divorced or widowed spouses, in some instances, can harness a spousal or survivor benefit and then switch to their own benefit to harvest more Social Security income over his/her lifetime.
So what does the rule change mean for consumers? If a person filed for benefits within the past 12 months, their benefit election should be reviewed by a qualified financial professional, because there may still have some time to repair it. And, if a person is about to file, it is prudent to evaluate benefit election options methodically and carefully. If a mistake is made, or a person’s financial picture changes, the new policy ruling only allows 12 months to fix it.