The budget bill the White House and congressional leaders hammered out earlier this week could shut down two popular Social Security claiming strategies that married couples and their financial advisers have come to rely on to squeeze the maximum from their retirement benefits.
The bill would end two strategies that combined add “tens of thousands of dollars” to a couple’s lifetime retirement income, in part by allowing one spouse to claim as many as four additional years of a spousal benefit. The strategies under fire—known as file-and-suspend and a restricted application for spousal benefits—attracted interest in the wake of a 2000 law that allowed Social Security beneficiaries to voluntarily suspend their checks after they had applied for benefits.
While it wasn’t the law’s intent, the option to file and suspend made it possible for a worker’s spouse to start collecting a benefit based on the worker’s earnings record while the worker took advantage of delayed retirement credits. Those credits increase a worker’s benefit by 6% to 8% for each year he or she delays claiming between the ages of 66 and 70.
In recent years, the Obama administration has targeted the strategies.
Social Security Administration actuaries recently estimated the repeal of these strategies would save around 0.02% of the wages and self-employment income subject to Social Security tax over 75 years—or less than 1% of the total Social Security deficit of about 2.68% of that income.
Currently, only about 100,000 individuals are taking advantage. However, the popularity of the strategies—and their cost to Social Security—would undoubtedly increase in the future as large numbers of baby boomers retire.
The strategies are valuable for couples who have the financial wherewithal to time the start of their benefits for the maximum expected payoff over their lifetimes. By contrast, many individuals find they need to start collecting at the earliest possible age, usually 62, to pay their bills. According to a 2009 report by Boston College’s Center for Retirement Research, if everyone who could benefit from the strategies used both, 45% of the additional benefits earned would be paid out to wealthiest 40% of Social Security beneficiaries.
For couples, the Social Security claiming decision can be especially complicated because of the availability of spousal and survivor benefits. But with more claiming options, couples can engineer a larger payoff, too.
For instance, a married man who first claims Social Security at his full retirement age—66 for those born between 1943 and 1954—might have a choice of two retirement benefits: one based on his own earnings record or a spousal benefit based on half of his wife’s full benefit. At full retirement age, but not before, he would have the option under current law to file a restricted application to claim only the spousal benefit. If he did that, he could switch at some future date to his own earned benefit, which would have grown larger thanks to his delay in collecting it.
With the file-and-suspend, or claim-and-suspend, approach, meanwhile, a person who claims Social Security at full retirement age or later can immediately suspend the benefit. That can make it possible for the worker’s spouse to file for a spousal benefit, without the worker actually collecting a benefit. And if the spouse files a restricted application, both individuals can delay claiming under their own earnings records—to reap higher benefits down the line.
Starting six months after the budget bill goes into effect, Social Security will no longer allow family members to submit a new claim for spousal benefits on a suspended benefit.
Under the bill, anyone 62 or older this year will retain the ability to file a restricted application at age 66 or older to receive only a spousal benefit. But they will be able to do this only if their spouse is already claiming a benefit. For those younger than 62 this year, the restricted-application strategy will no longer be available.
When married individuals apply for a retirement benefit other than with a restricted application, they receive either their own earned benefit or a spousal benefit—whichever is higher—instead of having a choice.