How to Borrow From Social Security Interest-Free

people standing in front of a social security office
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It's possible to stop and "reset" your Social Security benefits after you begin receiving them by paying back everything you've received so far. Then you can wait until you're older before reclaiming the benefits so you receive a larger 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 get to keep any interest you earned on those benefits. The Social Security Administration has placed significant limits on this practice, however, so it's no longer as beneficial as it was in past years.

When to Start Receiving Benefits?

Deciding when to start receiving Social Security benefits can be one of the most stressful decisions any retiree has to make.

Nearly every American can choose to begin taking benefits at any time between age 62 and age 70. Social Security payments are reduced for early retirement before full retirement age, however, so an individual living to an average life expectancy will receive the same amount of money regardless of when he retires.

Your decision on when to take benefits will be based upon your current income situation, your health, and many other factors. It's not uncommon for someone to claim benefits only to realize that it was a mistake. This is where the "free loan" payback option comes in.

The Social Security Payback Option

The Social Security administration allows retirees to change their minds about the age at which they want to begin to take benefits, but this provision comes with some significant restrictions:

  • You can withdraw your application for Social Security benefits within 12 months of initially filing.
  • 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.
  • You must withdraw benefits within 30 days of making the request.

These restrictions are more stringent than they were in the past, and this strategy might be more of a short-term loan strategy with some strings attached.

If you miss the 12-month deadline, you're locked in for life.

The Old Rule

It used to be that someone who began collecting benefits at age 62 could decide to reverse his decision at age 70 and pay back all the Social Security benefits he'd received so far. From that point forward, he would receive a much larger benefit based on the new starting age of 70.

Needless to say, this cost the government a good bit of money. The Center for Retirement Research estimated that folks using this interest-free loan strategy were costing Social Security between $5.5 billion and $8.7 billion per year. As a result, the Social Security Administration closed this loophole in 2010.

The Bottom Line

Social Security's provision that allows you to change your mind is most useful to people who actually do 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. But if you're faced with a cash emergency that's likely to rectify within a year, it can be a viable option.

Keep in mind that you will not receive a lump sum of benefits. They'll be paid to you incrementally over the 12 months, just as if you weren't planning to pay the money back. And you're locked into receiving benefits for the rest of your life if you don't repay the "loan" within the prescribed time.

That could be quite a hit. As of 2018, you'll receive only 74.2 percent of your monthly benefit if you begin collecting at age 62, whereas you'll collect 92.2 percent if you wait until age 65. That's a significant difference over the long haul.