Q. I hear that Congress and the White House have done away with a strategy that many couples have used to increase their Social Security benefits. Is this true?
A. It is. As of April 30, new legislation that Congress passed and the president signed will effectively kill off the so-called "file and suspend" spousal strategy that added thousands of dollars to the benefits received by qualifying married couples.
Q. Where did this strategy come from?
A. The file-and-suspend rule dates back to 2000, when Congress adopted the Senior Citizens Freedom to Work Act. According to financial planner Michael Kitces of the Pinnacle Advisory Group, which has offices in Maryland and Florida, it was intended to make it easier for people who were at full retirement age or older to suspend their benefits and go back to work.
Initially, the rule did not attract much attention. But then financial planners and retirement experts began to write about provisions in the fine print that allowed couples to use the strategy to improve their household finances through spousal benefits. A growing number of people began signing up for it.
Q. How does the strategy work?
A. It's easiest to give an example, with a married couple we'll call Tom and Gina. Both are 66, their full retirement age. Gina has worked off and on throughout her adult life but is not currently working. If she took her retirement benefit now, she'd get $1,000 a month. Tom is currently employed and eligible for a $2,000 retirement benefit. He plans to continue working until he's 70.
So Tom applies to Social Security for his retirement benefit but, in the same breath, he says he wants to suspend the payments. Tom's action allows two things to happen.
First, because he's not receiving benefits, he starts to earn delayed retirement credits of 8 percent a year for four years until he reaches 70. That will increase his eventual retirement benefit by 32 percent, or to $2,640 a month, plus any cost of living adjustments.
He could have achieved this outcome by doing nothing — simply continuing to work and submitting no application to Social Security. But he files and suspends because of a second effect: Gina can now file a "restricted application" for just one kind of benefit, a spousal benefit.
That means that Gina can get a spousal benefit that is 50 percent of Tom's suspended benefit, or $1,000. Moreover, because Gina is not taking a retirement benefit on her own work record, she, too, can accumulate delayed retirement credits until she reaches age 70. At that point, she'll be eligible for a retirement benefit of $1,320 a month on her own work record.
So, at 70, she ends the spousal benefit. She and her husband then turn on the retirement benefit tap, and both receive the maximum amounts possible. In the meantime, while they were waiting those four years to do this, their household finances had been helped along by the spousal benefit of $1,000 a month.
Q. So what are the new rules?
A. The first thing to know is that, if you've already used this strategy, the new rules won't affect you — there will be no change in your benefits. And people who are at full retirement age or older will still be able to suspend benefits and then earn delayed retirement credits.
But what will change is that spouses will no longer be able to file a "restricted" spousal benefit-only application in this situation. Henceforth, according to Kitces, a benefits application from a spouse will be deemed to be an application for all benefits for which that person qualifies (in our example, retirement and spousal), and Social Security will pay whichever is higher. This will eliminate the ability to pick which benefit to take for now and later switch to the other.
Q. When do the new rules become effective?
A. Six months from the day President Obama signed the bill, which means April 30. "Those who are full retirement age — or will reach it in the next five months — will still have the opportunity to file and suspend before the crackdown takes effect," Kitces says. There will also be some special leeway for people born on Jan. 1, 1954 or earlier.
Q. So why did Congress kill this strategy?
A. It was done as part of efforts to save money during negotiations in Congress over the Bipartisan Budget Act of 2015, the law that averted the threat of a government shutdown.
Paying the spousal benefit under the file-and-suspend strategy costs Social Security extra money, and the strategy didn't have widespread support in Congress. It only applies to certain people, after all — if you're not married, for instance, you couldn't take advantage of it. Legislators tended to regard it as a loophole that needed closing, and close it they did.
Q. How can I get more information about the changes?
A. Ordinarily, I'd give you a link to a page on the Social Security website. But I can't this time because on this subject, the information isn't there. That's because Social Security itself isn't yet clear on all the details of how it will implement this new law.
My query to the Social Security press office for more information produced only this response:
"Section 831 of the Bipartisan Budget Act of 2015 eliminates aggressive claiming loopholes related to 'deemed' filing and voluntary suspension of benefits. The new law will be implemented on a prospective basis only. Our legislative and policy staffs are diligently working with Congress to analyze the intent of the legislation and update our instructions."
But Kitces and other financial analysts have done a fair amount of writing on this subject. You might have a look at this detailed article by Kitces.
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