A Cautionary Tale

Losing a Bundle

A family frittered away a fortune in ten years. This story from the New York Times shows how easy it is for anyone to make poor financial decisions that make a big impact on their life.

http://www.nytimes.com/2010/11/26/business/26fall.html?_r=1&scp=1&sq=family%27s%20fall%20from%20affluence&st=cse

Social Security Rule Change

Do-Over is Done

The Social Security Administration last week ended the “do-over” provision. The do-over rule enabled people whose circumstances had changed -- maybe they found a new job, inherited some money unexpectedly or had a change of heart --  to pay back the benefits they had received and to delay receiving additional Social Security retirement benefits.  By doing so, they would receive much higher monthly checks when they did choose to retire.

The do-over involved repayment of the benefits received in a lump sum with no penalty or interest. In return, the recipient would receive the higher monthly benefits in the future. In extreme cases, by delaying receiving benefits from the early retirement age of 62 to age 70, the retiree could get a check twice as large counting cost of living adjustments. The total difference over a lifetime could amount to hundreds of thousands of dollars if the retiree and spouse live well into their 80s or 90s.

Only a fraction of the 50 million Social Security recipients were taking advantage of the do-over clause. The change in the rule was made after concerns were raised that it could be abused. The provision started receiving publicity in the financial press as an “interest-free loan.” The intention of the provision was not to provide people with interest-free loans, and therefore the SSA acted.

Only about 500 people a year were taking advantage of the rule and most were using it to adapt to their new circumstances. There was potential for abuse by people speculating with the money but that had yet to occur. Often overlooked by the press and commentators was that after taking taxes and  the administrative hassles into account, the interest-free loan generally wouldn’t have appealed to speculators.

The rule change, while it did not affect many people, highlights the importance of carefully analyzing one’s Social Security options before signing up for benefits. For nearly two-thirds of Americans, Social Security is the largest or second biggest asset in retirement and getting it right can make the difference in whether they’ll have a comfortable retirement.

Unlike some of the proposals to make big changes in Social Security retirement benefits, this rule change doesn’t require Congressional action. It is a rule that has been published in the Federal Register and as such it is effective immediately. But there is a sixty day comment period and the Social Security Administration could amend the rule afterwards.

Generally, changes to Social Security retirement benefits have taken place over a long time. From its inception in 1935, the full retirement age was 65. It has been increased to 66 now and is climbing gradually to 67 by 2027. This adjustment has been phased in gradually since the last big reform of Social Security in 1983.

A recent proposal to increase the full retirement age to 69 would not take effect until 2075 – in other words for today’s four year olds. Early retirement today starts at age 62 but with lower benefits than one would receive at full retirement age.

A common concern is that Social Security is facing insolvency. However, the trustees of the Social Security Administration report that they will be able to meet all obligations for several decades without any changes to the current benefit structure or funding and they expect Social Security to be secure long into the future.

http://blogs.forbes.com/janetnovack/2010/12/08/social-security-administration-kills-do-over-to-boost-benefits/