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Social Security Administration eliminates “withdrawal of application"

By Bruce D. Schobel
Vice President and Actuary, New York Life Insurance Co.

One of the best deals available from the Federal government came to an end on December 8, 2010, when the Social Security Administration (SSA) closed the door forever on the “withdrawal of application” provision. This provision, which was purely administrative in the first place and was neither authorized nor repealed by Federal law, allowed any Social Security beneficiary to “withdraw” his or her original application, repay all benefits received to date, and reapply for higher benefits based on the current attained age. In effect, the repayment of past benefits received was used to purchase an inflation-adjusted annuity, guaranteed by the U.S. government, at a bargain rate. The repeal is effective immediately, according to the announcement by SSA, although the agency is taking comments on this change in procedure through February 2011, and some terms may be altered based on any comments received.

The value of this provision, while it was in effect, is best illustrated by an example. Let’s consider a hypothetical worker, John, who was born in 1944, reached age 62 in 2006, reached age 66 (his Social Security normal retirement age) in 2010 and, presuming he survives, will reach age 70 in 2014. Let’s suppose that he was eligible for a monthly benefit from Social Security of $1000 per month at age 66. That’s a little below average but makes the arithmetic easy. Further, let’s ignore cost-of-living adjustments (which were nonexistent in 2009 and 2010, anyway).

As noted, John could receive $1000 per month from Social Security if he waited until age 66 to claim benefits. But if he claimed benefits at age 62, like most workers do, then they would be subject to a permanent reduction of 25 percent, to $750 per month. If he waits until age 70 to claim benefits, then he would receive 132 percent of his age-66 benefit, or $1320 per month.

Let’s suppose that John claimed benefits at age 62. Ignoring cost-of-living adjustments, his total benefits received in the eight years before reaching age 70 would be $750 x 12 x 8, or $72,000. If he had those funds on hand at age 70, then he could withdraw his original application, give back to SSA the $72,000 previously received (without interest, incidentally) and reapply for a new benefit of $1320 per month starting immediately. The increase in benefits would be $570 per month, or $6840 annually, at a cost of $72,000. The payback period would be about 11 years, ignoring cost-of-living adjustments, and that’s significantly less than life expectancy for a healthy 70-year-old. Moreover, the new, higher benefit amount would be inheritable by a spouse (or former spouse, if the marriage lasted 10 years or more). It would be unlikely not to come out ahead.

Although this procedure was used by only tiny numbers of beneficiaries over the years, it was becoming better known, and SSA decided that it constituted a misuse of scarce government resources. Thus, it ended the practice. Withdrawal of application remains possible, but only for 12 months from the original application date, which has negligible economic significance.

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Social Security Administration eliminates “withdrawal of application"

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