As with all government programs, regulatory complexity brings with it a variety of planning opportunities. Social Security is no exception, and since the passage of the Senior Citizens Freedom to Work Act in 2000, many married couples have been able to take advantage of a strategic planning initiative that ultimately increases the couple’s payments under that program. This strategy, commonly called “file-and-suspend” or “claim-and-suspend” was intended to help couples plan for retirement.
As with all good planning opportunities, there was a great deal of media coverage of this opportunity. Unfortunately, as a result, the strategy became a political issue, viewed as yet another loophole for individuals to take advantage of the system.
To better understand the mechanics of these rules, and the benefits to be derived therefrom, the following example was borrowed from the AARP website.
Assume, for this example, John and Mary, are a married couple. Both are 66, which is their full retirement age (FRA). Mary is retired; John plans to keep working until he is 70.
At 66, John, who had a bigger income than Mary over the course of his career, files for his full retirement benefits of $2,000 a month, but immediately suspends payment. By doing that, he will begin accruing delayed retirement credits. In other words, for each year that he keeps his payments in suspension, they will be 8% higher when he does eventually take them. The credits top out at age 70. Since John’s basic retirement benefit at age 66 was $2,000, his new payment if he waits until 70 to collect will be about $2,640, plus any cost-of-living increases.
When John filed for his benefits, he automatically activated Mary’s ability to apply for a spousal benefit. (Mary cannot file until John does.) Social Security rules provide that a spouse, whether or not the person ever worked, is entitled to a benefit equal to up to one-half of the other spouse’s retirement benefit. So Mary can collect $1,000 a month. But something else will also be happening as a result of her application for payments. Because Mary has reached her own full retirement age but is not taking her own retirement benefit, she will also accrue delayed retirement credits that will boost her own retirement benefit when she applies for those benefits in the future.
As a result of this strategy, Mary and John await the day when they activate their higher retirement benefits, and they will have a $12,000 a year cushion in the form of Mary’s spousal benefit. Note that if Mary had been at less than full retirement age but 62 or older, she still could have begun a spousal benefit based on her husband’s move to file and suspend, assuming that that benefit would be larger than what she was due on her own work record. However, the spousal payment would have been less than the full 50%. And she would be locking in a discounted rate forever, whether for the spousal benefit or her own work record benefits.
File and suspend can also have longer-lasting positive economic effects. For instance, if John were to die at 72, his decision to delay taking his Social Security until 70 will have had a very favorable impact on Mary’s survivor benefit. She will receive John’s full monthly payment, including his delayed retirement credits.
To close this perceived “loophole” the budget deal recently passed by Congress included a provision that would end some Social Security claiming strategies used by couples. The thrust of the provision is to eliminate these primary strategies.
The strategy, known as file-and-suspend or claim-and-suspend, and certain other restricted applications for spousal benefits, would end under the new legislation, although retirees will be able to still use the strategies for about six more months.
With a restricted application for spousal benefit, an individual who is at full retirement age files only for the spousal benefit, but not immediately for the full benefits available to both spouses, allowing their future benefits to grow.
Unfortunately, the legislative changes are significant and will lead to changes in many individual’s retirement plans. Moreover, a greater number of individuals may have to consult a tax or financial professional for advice on how best to deal with the changes.
However, the six-month recess allows that couples will be grandfathered until the end of next April. While helpful, the six-month phase-in period may be too brief to have an impact on many individuals who will soon reach retirement age and had included this strategy in their retirement plans. A longer time period to the effective date of the new rules would clearly have been more appropriate in this case.
Please contact Bob Grossman or Don Johnston at 412-338-9308 with comments and questions.
