Is Taking a Loan Against Your Social Security Benefits a Reasonable Option When You are Out of Work?
Q: Recently I read about a stimulus proposal that would allow people who are out of work to access $5,000 of Social Security benefits in advance, in exchange for waiting a few months longer to get benefits when people retire later. Could you explain what was proposed and how it would work?
A: The Washington Post has reported that “Senior White House economic officials are exploring a proposal floated by two conservative scholars that would allow Americans to choose to receive Social Security checks up to $5,000 in exchange for a delay of their Social Security benefits.” The proposal by Andrew G. Biggs of the American Enterprise Institute, and Joshua Rauh of the Hoover Institution, has been put forward as another way to get more money to Americans hard hit by the coronavirus recession.
With many still needing help, some Members of Congress are concerned about the high price tag of simply sending out another round of stimulus checks. The $5,000 would be considered a “loan,” and both the $5,000 plus interest would have to be repaid when people file a claim for benefits, even years or decades later. The proposal would make people repay their own Social Security benefits.
While some stories have reported that the advances could be paid off in about three months before benefits start, that statement does not accurately represent the size of accrued interest, which — depending on the amount of interest charged, and the length of time before a claim is filed for benefits — could be in the thousands of dollars.
In addition, the proposal is not clear about the permanent benefit reductions that could occur. Under current law, Social Security benefits are reduced up to 30% for claiming benefits prior to full retirement age, which is rising for people born in 1955 and thereafter. The longer people can wait (up to age 70) the more they will receive in benefits. However, if they have an outstanding loan with interest that’s accruing, there would be pressure to start benefits sooner than one otherwise would.
But the biggest issue is that the $5,000 loans would use revenues needed to pay the benefits of current retirees. These “advances” against future benefits would siphon tax revenues out of the Social Security Trust Fund and hasten insolvency. Once the Social Security Trust Funds are depleted, by law, benefits would be reduced around 23% to adjust to payroll tax revenues.
TSCL believes this is a bad idea all the way around. It would be very costly way to borrow money, and it puts your future benefits at risk by siphoning funds out of the Social Security Trust Fund.
Source: “Top White House Advisors, Unlike Their Boss, Increasingly Worry Stimulus Spending is Costing Too Much,” Jeff Stein, Josh Dawsey and John Hudson, The Washington Post, May 10, 2020. “Funding Direct Payment to Americans Through Social Security Deferral,” Andrew G. Biggs, and Joshua Rauh, April 19, 2020.