How to Borrow from Social Security Interest-Free

people standing in front of a social security office
••• Credit: Robert Nickelsberg / Contributor / Getty Images

Once you start your Social Security benefits, it's possible to stop and "reset" them by paying back everything you've received thus far. Then you can wait until you're older before reclaiming the benefits so that you receive a higher monthly benefit check. This allows you to use your Social Security benefits like an interest-free loan: you pay back the benefits you've accrued, but you keep any interest you earned on those benefits.

However, the Social Security Administration has placed significant limits on this practice, and so it's no longer nearly as beneficial as it was in the past. These days, at best, it represents a very short-term loan strategy, as opposed to a real retirement plan. Before you decide to try this, please review these rules carefully:

Why to Start and Stop Your Social Security Benefits

Deciding when to start receiving Social Security benefits can be one of the most stressful decisions any retiree makes. Nearly every American can choose to start Social Security benefits between age 62 and 70. Because the Social Security payments are reduced for early retirement (before normal retirement age), an individual living to an average life expectancy receives the same amount of money regardless of his chosen retirement age.

However, your individual decision on when to take benefits will involve your current income situation, your health, and many other factors. It's not uncommon for someone to claim benefits and then realize it was a mistake. That's where the "free loan" payback option comes in.

Social Security Payback Option

Although not commonly known or used, the Social Security administration allows retirees to change their minds about the age at which they begin to take benefits. This provision comes with some significant restrictions:

  • You can withdraw your application for Social Security benefits within 12 months of when you first became eligible for benefits.
  • You can withdraw your application for benefits within 60 days of when you applied for benefits.
  • You must repay all the benefits you and your family received based on your retirement application.
  • You must file form SSA-521 with the Social Security Administration.
  • You can only withdraw your application for benefits once in your lifetime.

These restrictions are far more stringent than they were in the past, making this "Social Security interest-free loan" strategy more of a very short-term loan strategy, with major strings attached.

Previously, someone who began to collect benefits at age 62 could decide, at age 70, to reverse his previous decision and pay back all the Social Security benefits paid so far. From that point forward, the person received the much bigger benefit based on the new starting age of 70.

Unfortunately, the Social Security Administration closed this loophole in 2010. Needless to say, it was very costly to the government. The Center for Retirement Research estimated that folks using this interest-free loan strategy cost Social Security between $5.5 billion and $11.0 billion per year.

The Bottom Line

These days, Social Security's provision allowing you to change your mind is most useful to people who actually change their minds about receiving benefits, as opposed to those who deliberately file and then rescind their applications as a strategy to garner an interest-free loan.