Social Security has a Little Known “Do-Over” Clause

Most seniors rely on Social Security benefits to make ends meet in retirement, says a recent article from The Motley Fool, "The Little-Known Social Security Do-Over Clause That's a Must-Know for Baby Boomers." While this under-the-radar Social Security do-over clause can help create a considerably larger Social Security payout, it comes with two catches and is unavailable for everyone.

Getting the most out of Social Security requires understanding how you are paid and the ins and outs of your own claiming decision.

Several factors impact how much of your Social Security benefit you get to keep. If you file early, you may be subject to the retirement earnings test. If you earn above a preset income threshold, you may have benefits taxed at the federal or state level. However, when you break Social Security down to the basics, four parts determine your benefits.

The first two are work history and earnings history. The Social Security Administration considers the 35 highest-earning, inflation-adjusted years when determining the monthly benefit. Workers must earn income for 35 years to avoid having a $0 averaged in by the SSA for each year less than 35.

The third factor is the full retirement age (FRA). This is when you become eligible for the 100% payout, determined by your birth year. Based on the retirement age charge, boomers' FRAs range between 66 and 67.

The fourth factor is your claiming age. For every year you wait to take benefits, your monthly payout rises by 8%, starting at age 62 and continuing through age 69. Taking benefits before your FRA means a permanent reduction of up to 40%, depending upon your birth year. However, if you can wait until after your FRA, you could increase your Social Security benefit by 24% to 32%.

Social Security's Annual Statistical Supplement shows that most retirees take benefits before full retirement age. As of 2021, 65% of the 47.29 million retirees took a permanently reduced monthly payout.

This is the optimal choice for many, meaning the selection generates the highest lifetime income from Social Security. For example, someone with chronic illnesses that shorten their life expectancy may benefit from claiming early. A lifetime low-income spouse could take their payout early to allow their higher-earning partners' benefits to grow over time. This is an excellent way to generate household income while future benefits grow.

Historically, early claims don't work out so well. A study released in 2019 found that just 8% of claimants at ages 62, 63, and 64 made an optimal choice. However, there's a silver lining for some boomers and future retirees who may regret their early claiming decision, even though it comes with two catches.

The Social Security "do-over" clause is Form SSA-521, officially known as "Request for Withdrawal of Application." This is a request to SSA to withdraw your benefits claim. If approved, the early claim is undone, and your benefits return to accruing up to 8% annually through age 69. This is especially helpful for workers with little or nothing saved for retirement who took a reduced payout but ended up back in the workforce not long after. Boomers landing high-paying jobs may file SSA-521 and forgo their payout in favor of a higher Social Security payout a few years later.

However, there are two significant restrictions. One, requests to cancel or withdraw the application can only be made up to 12 months after you start getting benefits. You can't use this form if you've received benefits for 18 months. You can also only cancel your benefits application once.

Secondly, you have to pay back every penny in benefits you received in the 12 months leading up to filing Form SSA-521. This includes any benefits spouses or children may have received based on your earnings history.

While this little-known clause has limitations, it may offer to select baby boomers a chance to start over if they took Social Security too early. It's not for everyone, but it's a must—know for all.

Reference: The Motley Fool (Aug. 27, 2023) “The Little-Known Social Security Do-Over Clause That’s a Must-Know for Baby Boomers”