The Federal Budget Deal Tweaks a Social Security Claiming Strategy

Buried in the budget deal signed by President Obama last week were two tweaks to the relatively arcane though profitable Social Security claiming strategies known as “file-and-suspend” and the “spousal benefit”. The two claiming strategies were put into place by legislation signed by Bill Clinton. The purpose was to give seniors an incentive to stay in the workforce longer. For the most part, the two claiming strategies only affect couples both of whom will reach full retirement age by May 1, 2016. Basically, for everyone, Social Security benefits increase 8% per whole year that the claimant delays taking their Social Security benefit beyond full retirement age. This increase is called delayed retirement credits. Delayed retirement credits stop accruing at age 70. As a result, most financial planners will normally encourage people to wait/work as long as possible until the age of 70 as the 8% guaranteed increase in benefit each year is almost impossible to beat. The following table shows Social Security’s full retirement age by year of birth.

For Couples

The file-and-suspend claiming strategy made it possible to both members of a couple who are past full retirement age to delay claiming benefits based on their own earnings records while the lower earning spouse received a spousal benefit based on the higher earning spouse’s earnings. The spousal benefit is generally calculated as 50% of the other person’s benefit that would otherwise be paid at full retirement age. To do this, one individual files for benefits and suspends them, while the other files a restricted application to collect only a spousal benefit – not his or her own earned benefit even if it would be higher than the spousal benefit. That way, both individuals can take advantage of the delayed retirement credits while getting some Social Security benefits in the meantime. At age 70, the individual claiming the spousal benefit would then have the option to take the higher of the spousal benefit or the benefit based on their own earnings as escalated by the delayed retirement credits. In effect, the party claiming the spousal benefit gets a second bite of the apple at age 70. The new law ends that strategy. Under the new law, after May 1st 2016, Social Security will no longer allow spouses to submit a new claim for spousal benefits based on the earnings record of a worker who has suspended his or her own benefit. So for a married couple who will both be Social Security’s full retirement age before May 1st, 2016, there is still a limited window to elect the file-and-suspend benefit claiming strategy. Couples who are already using the file-and-suspend claiming strategy are grandfathered so there is no effect on their benefits as a result of this change in the law. The spousal benefit is also going away. Workers who turn 62 or older this year may still file for a spousal benefit but the benefit will be the higher of the spousal benefit or the workers own benefit at the time the claim is made. There is no ability to take a second bite of the apple. Workers who delay claiming their benefit until after full retirement age can still enjoy the 8% delayed retirement credits until age 70. For workers under 62 years of age this year, that one time option of a spousal benefit is gone.

For Widows and Widowers

Generally, widows and widowers won’t be affected by the new law. Individuals who are eligible for both earned and survivor benefits will continue to have several claiming strategies open to them. Starting at age 60, a survivor can take a reduced benefit based on his or her deceased benefit and then switch to his or her own benefit later if it is higher. Alternatively, the survivor can start with his or her own benefit as early as age 62 and then switch to a full survivor benefit at full retirement age. Ostensibly the changes are being made because it will save the Social Security administration on the order of 10 billion dollars a year over time. Moreover, only about 100,000 people have actually elected the file-and-suspend strategy as most people in recent years have tended to claim early retirement benefits due to the job market and the urban myth that Social Security will run out of money.

For Single People

For single people who will reach full retirement age before May 1st 2016, “file–and–suspend” allowed a single individual to file for benefits and then suspend them. Delayed retirements would accrue but if for some reason, the individual did not wait until age 70, the individual could go back and claim the full retirement age benefit and get the lump sum payment of all benefits that should have been paid had the file-and-suspend application not been in place. Of course the 8% delayed retirement benefits were forfeited.

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