As Predicted, Social Security Closes Door on Benefits 'Do-Over' Strategy

The Social Security Administration has eliminated a loophole that had allowed Social Security recipients to start receiving benefits when they first became eligible without being permanently locked in to the lower benefit level.

Although you can collect Social Security benefits starting at age 62, if you do, your benefits will be significantly lower than if you wait until your full retirement age or even later. About half of Americans file at 62, but "in most cases it's a costly mistake," says retirement journalist Mark Miller.

A little-known provision of Social Security law had allowed beneficiaries to have their cake and eat it, too -- to apply for benefits when they first became eligible and later withdraw their application for early benefits and reapply and receive full retirement benefits. The catch was that the recipient had to pay Social Security back all the money they had pocketed so far. But no interest was due on the benefits received, so the money was in effect an interest-free loan. The policy was designed to provide an escape hatch for those who took early retirement and then went back to work.

Under the new rules, retirees may withdraw their Social Security applications only once and only within 12 months of first receiving benefits.

Due to the payback requirement, the "do-over" strategy was available only to more affluent recipients and was little used, although word had been spreading. In 2007, Social Security processed only about 500 withdrawal applications, but that number had more than doubled to 1,015 in 2009 and processing the new applications was becoming an administrative headache for the agency.