The bipartisan budget deal signed into law in November by President Barack Obama jolted some near-retirement couples — and the retirement planning world — by closing a loophole in Social Security law that a growing number of married couples were using to substantially increase their benefits.
The law makes changes in two Social Security claiming maneuvers: “file-and-suspend” and “restricted claims.”
In the long run, closing the loopholes will simplify the range of Social Security claiming choices available to couples. But for now, the clampdown has created many questions about the closed loopholes.
Here are answers to some key questions:
What’s all the commotion about?
Both of these maneuvers were not very well-known to the public until the past few years. The techniques exploit a loophole created when the Senior Citizens Freedom to Work Act of 2000 became law.
The main intent of the law was to give people incentives to work longer by allowing them to work and receive full Social Security benefits after they reached full retirement age. Several years after its passage, some clever financial advisers noticed that the language opened the door for the file-and-suspend and restricted-claim maneuvers. Restricted applications and file-and-suspend are used to boost a couple’s lifetime Social Security benefits by allowing them to accumulate delayed retirement credits while also collecting a benefit.
How did the benefit-boosting loophole work?
The first maneuver is called file-and-suspend. The spouse with a higher benefit — typically the husband — files for his benefits at full retirement age and then suspends them, continuing to accrue delayed retirement credits. That allows the lower-benefit spouse to file for her own benefit, but “restricting” the application to a spousal benefit only. The restricted application effectively delays the filing for her own benefit, allowing it also to continue earning delayed retirement credits.
How much in additional benefits could married couples get using these claiming techniques?
That depends on the couples’ primary insurance amount (PIA), but it can typically range from $35,000 to a little more than $60,000 in today’s dollars.
What is changing under the clampdown?
The budget act prohibits new file-and-suspend claiming, starting six months after the legislation’s enactment. (President Obama signed the law on Nov. 2.) And it disallows restricted applications for anyone who has not reached age 62 by the end of calendar year 2015.
Does this clampdown mean workers can’t gain any advantages by coordinating their Social Security strategies?
Couples will still be able to benefit by considering a range of options. Should one or the other spouse start benefits early, should both delay, or should both file early? Most often, couples will benefit if the higher-benefit spouse delays filing to earn delayed credits.
How can I determine the best strategy for myself and my spouse?
Both spouses should begin by checking their annual Social Security statements, which estimate benefits at age 62, full retirement age, and age 70. This gives you a starting point for massaging the numbers. You can download your statement at any time if you have a (free) MySSA account at the SSA website, ssa.gov/myaccount
A growing number of financial planners are familiar with the Social Security rules, as are advisory services offered to workers by many 401(k) plan sponsors. But be sure that whomever you work with has updated their tools to reflect the new budget law.
Mark Miller edits and publishes RetirementRevised.com. His column is distributed by 50+ Digital, LLC.