This week, as we recharge for the new year, we highlight a few of our best-read blogs of 2015. This piece, which originally ran in October, was our best-read Daily Economy blog of 2015. The president ended up signing the budget deal into law.
The U.S. budget deal includes a provision that seeks to end the file-and-suspend and restricted claiming strategies. I explained these strategies in recent blogs as a way to bring couples upwards of $60,000 more in total Social Security benefits.
The section of the bill is titled “Closure of Unintended Loopholes.” Let’s take a look at the details of the proposal, who it will affect, and what you can do now.
What’s the deal?
Under current law, two-earner couples have the option to have one spouse file for Social Security benefits without actually claiming the money (file and suspend) while the other spouse files a restricted application for only spousal benefits. In effect, both workers have been able to delay their own benefits until age 70, at which point they can claim the maximum available benefit. This strategy allowed them to claim “free money” – the spousal benefit for one spouse – over the course of four years. Filing the restricted application for spousal benefits had no impact on either spouse’s own earned benefit.
The proposed legislation – which at this hour has passed Congress and awaits the president’s signature — will close this loophole. You will not be able to file and suspend and have a spouse claim a spousal benefit on your record. Nor will a spouse be able to file a restricted application for spousal benefits even if you are collecting. If you want to claim a spousal benefit, you will be “deemed” to claim your own, at which point you can no longer incur additional delayed retirement credits. In other words, once you claim spousal benefits, your benefits are not going to go up.
Who is affected?
The primary beneficiaries of this filing strategy were two-earner married households that were planning to delay benefits past the full retirement age. Since higher income people have more financial flexibility and the means to delay Social Security benefits, the strategy was primarily used by those households.
Also affected are ex-spouses who were hoping to file restricted applications for ex-spousal benefits while delaying their own benefits.
Will anyone still suspend benefits?
Technically, you will still be able to suspend benefits. What will change is that someone can’t file a restricted spousal benefit on your record, meaning there will be no advantage to file and suspend. However, some people will still choose to suspend benefits.
If you file, there is a one year window to withdraw your application (and pay back benefits) if you change your mind. If you’ve filed your benefits and it’s been more than a year but you had a change of heart, you can still suspend benefits (as long as you’re still below age 70). Your benefits will be reduced for your early claiming, but suspending them can increase future benefits. Basically, this is still an option if you’ve changed your mind about when you want the money.
When will this change take effect, what can I do right now?
All of this is subject to further revision as it is unclear exactly how the details will play out, but it looks at this point as if people currently running the file and suspend strategy will be grandfathered in and are not scheduled to be affected by the legislation (this was not the case with the first draft of the bill). The new rules will kick in 180 days after the budget passes.
For people at least 65.5 years old when the legislation is enacted who have a spouse that is at least as old, they may be able to sneak in just under the wire and still take advantage of the existing file and suspend strategy.
People who are at least age 62 when the bill goes into effect will retain the eligibility to file a restricted application for spousal benefits, but the spouse must be claiming (not suspending) benefits. This will be helpful if the spouse is older and will be collecting benefits anyway.
The other option for couples with a younger spouse currently between ages 61.5 and 65.5 and an older spouse between 65.5 and 70 is to set in motion the start-stop-start strategy. This isn’t as good of a deal as the old file-and-suspend strategy, but it could still be financially beneficial. There are lots of “ifs” to look at here, but this is the idea. You could potentially do the following:
- Have the younger spouse collect early benefits (let’s assume it’s the wife for simplicity).
- Have the older spouse (the husband) file for restricted spousal benefits, grandfathered in under the new legislation.
- When the husband turns 70, have him switch from spousal to his own benefits.
- When the husband switches to his own benefits at age 70, have the wife suspend her benefits in order to get delayed retirement credits. Note that there will still be an overall reduction in her benefits based on early claiming. This may or may not make sense depending on your long-term plans.
For people under age 62 when the bill goes into effect, it seems there will be nothing you can do to get in on the old deal.
Who is not affected?
It seems that survivor benefits are not affected by the legislation. If you’re the surviving spouse of someone with an earned benefit, you are eligible for survivor benefits.
The calculation of these benefits is complicated, but if it was a much higher earning spouse who passed away, the spousal benefits are probably worth taking at the full retirement age. Survivor benefits do not go up past the full retirement age. This may mean claiming your own benefit early and then switching to survivor benefits.
On the other hand, if you earned significantly more than your spouse, it may be wise to take the reduced survivor benefit early and delay your own benefit until age 70. The deeming provision does not apply to survivor benefits, meaning you can still file for one type of benefit without affecting the other.
Is it a good idea to close the loophole?
According to the Center for Retirement Research, restricted claiming strategies (inclusive of file and suspend) had the potential to cost the Social Security system up to $10.5 billion per year. However, since only an estimated 100,000 people are taking advantage of the loophole, this amendment is only estimated to reduce the Social Security deficit by about 0.02 percentage points, reducing the total shortfall to about 2.66 percent of wages and income. That said, the popularity for restricted spousal claiming and file-and-suspend strategies has certainly grown. The laws that enabled these strategies were passed in 2000, meaning that we’ve only had 15 years to understand and take advantage of the loopholes.
It will certainly benefit the financial sustainability of the Social Security system to close these loopholes, even as it stinks for people that were planning on getting an extra $50 or $60 grand from the system. Since most of the benefit went to higher income people with the financial flexibility to delay claiming, closing the loophole probably won’t bring anyone to financial ruin. But it may force some people to work a little longer than expected or to modestly adjust retirement spending plans.