The recently passed Bipartisan Budget Act of 2015 included some important changes to a popular couples Social Security claiming strategy. File and suspend with a restricted application for spousal benefits can add some $35,000 to $60,000 or more to the overall benefits collected by a couple. Congress and the administration deemed this a loophole benefiting the rich and the ability to execute this claiming strategy for couples goes away as of April 30, 2016.
What Is the File and Suspend Claiming Strategy?
Under this strategy spouse A will file for their Social Security benefit at their full retirement age (FRA), which is 66, and then immediately suspend their benefit. Spouse B will file a restricted application for benefits at their FRA in order to collect a spousal benefit based upon spouse A’s earnings record.
Spouse A will continue to accrue delayed credits, and their benefit will grow 8% annually until age 70, when they will resume taking their benefit. Spouse B’s own benefit will also continue to accrue delayed credits at 8% annually, and at age 70 they can switch to their own benefit if it is higher than the spousal benefit.
The Budget Act eliminates this strategy as of April 30, 2016.
- After that date if anyone suspends their benefit, nobody else, such as a spouse or eligible child, will be able to draw a benefit off of their earnings record while their benefit is suspended.
- The ability to file a restricted application for benefits based upon someone else’s earnings record goes away after April 30, 2016, except for those who were born in 1953 or earlier. Going forward, filing for benefits of any sort will mean that you are deemed to have filed for all benefits you may be entitled to. This includes your own benefit, eliminating the ability to collect a benefit based on someone else’s earnings record while allowing your own benefit to grow until age 70.
Who Can Still Take Advantage?
- Any couple that has already executed the file and suspend with a restricted application strategy is unaffected by these changes. They can continue on as is.
- Any couple that is eligible to execute this strategy before April 30, 2016 will be allowed to do so. So if one spouse has reached their FRA, they can file and suspend. The other spouse can still file a restricted application and receive a spousal benefit as long as they file the restricted application prior to April 30, 2016.
- Anyone who will be age 62 or older as of the end of 2015 (born in 1953 or earlier) will retain the ability to file a restricted application to receive a spousal benefit based upon their spouse’s earnings record. Remember, however, they will need to wait until they have attained their FRA, and their spouse must actually be taking a benefit. Just as before, the spouse taking the spousal benefit via a restricted application will allow their own benefit to grow by 8% annually until age 70.
Impact on Divorcees
The impact on divorcees will be similar to married couples. Under the current rules divorcees who were married to their ex-spouse for at least 10 years were able to file for a spousal benefit based upon their ex’s earnings record and let their own benefit accrue delayed credits until age 70.
Under the new rules those born after 1953 will be subject to the same restricted application limitations as married couples after April 30, 2016. Additionally the same restrictions on the ability to draw a benefit on someone else’s earnings record once they have suspended their own benefit will also apply here.
Impact on Widows and Widowers
These rule changes will have no impact on the ability of widows or widowers to collect a survivor’s benefit based upon their deceased spouse’s earnings record.
While this strategy will be off the table for many near-retirees, they still should think about when to claim their Social Security benefits. For the spouse with the higher benefit, it still likely makes sense to defer claiming their benefit as long as possible. The increase of 8% per year between their FRA and age 70 is tough to beat in terms of investment returns on most investment vehicles.
As for the spouse with the lower benefit, it may or may not make sense to delay, and this decision should be part of the couple’s overall retirement income planning.
Note that this took a lot of people involved with Social Security and retirement planning by surprise. Many of the decent calculators on the web are being updated and I’m sure there will a set of new “best practices” in terms of couples’ claiming strategies in the coming weeks.
The file and suspend with a restricted application strategy will be eliminated after April 30, 2016. Couples who are not able to take advantage of this opportunity before the deadline will need to rethink their Social Security claiming strategy.