Payback: Making Money Off Social Security

By Joe Mont
The Street.com
July 10, 2009

Americans give the government interest-free loans with their salary withholdings. There's a way to turn the tables.

In what could be called a free loan from the Social Security Administration (SSA), savvy investors have found a way to maximize the federal benefit by telling the government to stop sending the monthly checks, repaying what has already been received and, years later, refiling their claim.

The strategy can potentially yield big profits if the money is invested, according to the Center for Retirement Research at Boston College. Though, of course, all of it could be lost.

There's a little-known provision that allows individuals already collecting Social Security to "change their minds and start over" by filing Form SSA-521, the report said. For example, a retiree can claim Social Security at age 62, halt payments and reclaim at age 70, and receive a higher benefit, provided he has paid back the money previously received. That could produce as much as $14,000 more a year as payments are spread out in accordance with life expectancies.

In essence, the claimant is a borrower required to pay back only the principal. The payments could, over time, be invested with the interest pocketed. Retirees could sock the money in a Roth IRA and invest in stocks. That way there would be no withdrawal or tax penalty. Traditional IRAs and money market accounts would be other safe resting places for the money to grow. If a retiree followed this strategy earlier this year by putting money near the bottom of the stock-market rout, he could have doubled or tripled returns in a few months. Citigroup's (C Quote) stock quadrupled in two months, while Bank of America (BAC Quote) and General Electric (GE Quote) also surged. Simply investing in the S&P 500 Index in early March would have generated a gain of about 30%.

Alicia Munnell, director of the Center for Retirement Research at Boston College, said a growing number of financial planners are advising the strategy to their clients.

"The financial-service firms might come in and offer a product that makes it more widely available," she said. "Because there is money to be made, any innovative person could say, 'How about I lend you the money [for the initial payback] and then we split the gains?' "

The strategy isn't for everyone. It's best suited for those in good health who aren't financially dependent on their monthly Social Security checks. There is a risk that the claimant could die before reaching his average life expectancy, losing the very gamble that would make the effort profitable. The Boston College report estimates investors could lose billions of dollars, particularly during bear markets.

"The irony is that the IRS demands interest-free loans from taxpayers in the form of wage withholdings," said Kent Smetters, an associate professor of Insurance and Risk Management at the Wharton School, who added that the loophole ought to be closed. "I guess the SSA loophole is a way for the average taxpayer to stick it back to the man."

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