President Obama has recently signed the Bipartisan Budget Act of 2015 that addressed a potential impending default on U.S. debt. The legislation surprised many financial advisors because it also included a series of provisions that will have a dramatic impact on a popular social security claiming strategy for married couples.
For those financial advisers and their clients who were counting on implementing a coordinated claiming strategy to maximize Social Security benefits, it’s time to revisit and create a new strategy.
Elimination of File & Suspend Strategy – What It Was
The bill eliminates a strategy that allowed married couples to boost lifetime Social Security retirement benefits. The strategy, commonly referred to as “file and suspend,” was a provision of the
Senior Citizens Freedom to Work Act of 2000. Aspects of the law were designed to encourage seniors to work past their Full Retirement Age.
Soon, advisors realized that the law could be timed to increase social security benefits for married couples in certain situations. “File And Suspend” was sequenced to work this way:
1. One spouse (typically, the higher earning spouse) would apply for retirement benefits when he or she reached full-retirement age, thereby permitting a younger spouse to claim spousal benefits – an amount equal to 50% of the filer’s full benefit. A spouse couldn’t collect a spousal benefit UNTIL their spouse filed for retirement benefits.
2. The original filer would then immediately “suspend” his or her own benefits – meaning the younger spouse could receive their spousal benefit, but the filer would not.
For every year the original filer elected to not receive his or her benefit, the Social Security Administration would increase the filer’s benefit by 8% – an amount called a “delayed retirement credit.”
3. After a number of years, the original filer would then resume his or her benefits, and receive the additional 8%/year for delaying the benefit.
The End Of File & Suspend
While the strategy offered potential benefits for shrewd filers, the Center for Retirement Research noted that File & Suspend added $9.5 billion dollars in annual benefit costs to the Social Security program.
Under the new legislation, if an individual chooses to suspend his or her retirement benefits, the suspension will halt not only their own benefit, but also any spousal benefit tied to the individual’s job credits during the suspension period. The perceived “loophole” has effectively been eliminated.
Impact For Current File & Suspenders
Since the new legislation regarding suspension of benefits only applies to requests for suspension after the law’s effective date, anyone who has ALREADY requested a suspension of benefits, or who does so in the next 6 months (if you reach full retirement age of 66 within the next 6 months), remains eligible for the strategy.
Limited Planning Opportunity
There is, however, a narrow grandfathering provision that allows anyone who reaches age 62 before the end of 2015 to receive spousal benefits under the old “file and suspend” rule.
Also, anyone who will be 66 or older before May 1, 2016 and has not yet filed for their social security benefit may still make the restricted application that suspends their benefit and allows their spouse to claim spousal benefits. After May 1, 2016, a married worker will be required to file and begin receiving his or her own benefit to allow a spouse to receive spousal benefits.
Very importantly, the core benefits of Social Security have not changed under the new legislation. Several spousal strategies remain in place, and couples should study them carefully. It may still make sense for higher-earning spouses to delay their filing, and some lower-earning spouses may want to file for the 50 percent spousal benefit ahead of their own full retirement ages, if that benefit is greater than their own full benefit.
Our team at Annex Wealth Management is standing by to review your situation and develop an optimal strategy for you.