Q. Last fall, Congress rewrote the rules at Social Security to get rid of so-called loopholes that for many years allowed some married couples to improve their retirement benefits. Why did this happen and what strategies remain?
A. The changes to Social Security were part of the Bipartisan Budget Act of 2015, which averted the threat of a government shutdown. To save money for Social Security, Congress eliminated a long-time claiming strategy called "file and suspend."
That strategy was complex, so to understand it, let's look at the experience of a couple we'll call Harry and Marie.
When Harry reached his full retirement age at 66, he filed for his $2,000 a month retirement benefit. But he quickly suspended the benefit, telling Social Security not to send him any money. Harry's action accomplished two things: First, he became eligible for Delayed Retirement Credits of 8 percent a year, which he could earn by not receiving benefits during the four years between age 66 and 70. By the time he reached 70, his $2,000 a month benefit would increase to $2,640, plus any cost-of living raises.
Second, because Harry had filed for his benefits, his wife, Marie, who is also at full retirement age, became entitled to a spousal benefit equal to 50 percent of Harry's suspended benefit, or $1,000 a month. She could collect that money going forward, and then at a future date switch over to her own retirement benefit, which would have also continued to grow due to Delayed Retirement Credits.
See also: The Spousal-Benefits Puzzle
Q. So why is this considered an unfair loophole?
A. The old system allowed a spousal benefit to be paid while the worker was not collecting retirement benefits and was building up credits for a higher benefit down the road. In Social Security's view, you should not be able to "receive one type of benefit while at the same time earning a bonus for delaying the other benefit."
Other critics have called file and suspend unfair because only a relatively small number of couples who met the conditions of age, etc., could take advantage of it.
Social Security ended file and suspend by ruling that if workers at full retirement age suspend their benefits to earn higher benefits in the future, other related benefits such as spousal benefits will also be suspended. In other words, there's no point in filing and suspending, because both benefits will stop. If you want to earn Delayed Retirement Credits, you should just do the old-fashioned thing and not file at all.
Social Security also adopted a concept called "deemed filing." This means that if you qualify for both a retirement and a spousal benefit, and you apply for one of them, you will be "deemed" to be filing for the other as well. You can't pick which benefit you want. You will be paid whichever benefit is higher. That also thwarts the whole point of file and suspend.
Q. I heard there was a grace period for ending file and suspend?
A. There was, but it's expired. Acceptance of new applications for file and suspend officially ended on April 30, six months after the enactment of the legislation (though qualifying people who had filed before that were grandfathered in).
But a related strategy known as "Restricted Application" remains possible for certain people.
Q. How does that work?
A. Like this: Your full-retirement-age spouse applies for retirement benefits and begins collecting. You apply for just the spousal benefit (you "restrict" your application to just that benefit) based on your spouse's work record, even though you could get a higher amount as your own retirement benefit. Going forward, you collect that benefit and continue to build up Delayed Retirement Credits that will make your retirement benefit higher when you eventually switch over to it.
Q. But I thought "deemed filing" made it impossible to choose which benefit you want.
A. Not for everyone. Age comes into play. The new rules say that deemed filing doesn't apply to you if you were born on Jan. 1, 1954, or earlier). You can still do a restricted application for just spousal benefits and delay your own retirement benefits. But if you were born after Jan. 1, 1954, you can't — filing for one type of benefit is deemed filing for both.
Social Security expert Michael Kitces of the Pinnacle Advisory Group in Columbia, Md., notes that you must be full retirement age or older to do a restricted application. People born in, say, 1949, can do it now, but people born in 1955 will have to wait until they reach their full retirement age.
To recap: the new rules for deemed filing at or beyond full retirement age apply only to people born in 1954 or later.
Here's how deemed filing will work in the future: Joan is now 62. Her husband, Ralph, is 65. They've each worked enough years to earn retirement benefits. In March 2020, Joan will reach her full retirement age of 66 and will be eligible for a full 50 percent spousal benefit on the work record of Ralph, who's already receiving retirement benefits.
But even though she's full retirement age, she won't be able to file only for the spousal benefit and delay filing for her own retirement payments. If she files, she will be deemed to be filing for both benefits and will receive whichever one is higher.
Q. Do the rules for deemed filing apply to all benefits?
A. No. The rules apply only to retirement benefits based on your own work record and to the spousal benefits (including divorced spouse's) that you can receive based on a spouse's work record.
But there are two exceptions in which deemed filing does not apply even to these benefits. If you receive a spousal benefit because you are caring for a child who is under age 16 or disabled, or if you receive a spousal benefit and are also entitled to disability, deemed filing does not apply to you.
Q. So what other income strategies are still available to couples who receive Social Security?
A. For most people, it's back to basics. They'll have to rely on traditional strategies that were in use before file and suspend. These include the all-important decision: When should two workers in a married couple take their Social Security benefits?
When making those decisions, Kitces advises, they would be wise to consider the state of their health and the longevity histories of their families. Successful Social Security strategies often depend heavily on betting correctly on how long you'll live.
"For the average scenario," Kitces says, "where the couple either has average health, or at least one person has good health, the optimal strategy is typically for the higher earner to delay [benefits] as late as possible and the lower earner to start as early as possible."
By postponing benefits as long as possible, high earners who are in good health will earn that 32 percent bonus from Delayed Retirement Credits and will increase the size of the survivor benefit potentially payable to the spouse in the future.
Meanwhile, low earners who start their benefits at age 62 — the earliest time available — will receive monthly benefits that are reduced by about 25 percent from the full retirement age level. For instance, a $1,000 benefit will be cut to $750 a month.
Even so, $750 a month means $9,000 a year. And in the four years from age 62 to 66, it will add up to $36,000. That income can help a retired couple bolster a savings program that rests on both early and late benefits.
Stan Hinden, a former columnist for the Washington Post, wrote How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire. Have a question? Check out the Social Security Mailbox archive. If you don't find your answer there, send an email to the Social Security Mailbox.