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Two Social Security strategies that have enabled married couples to increase their total benefits by tens of thousands of dollars will soon be a thing of the past. For some couples, this will mean lower-than-expected retirement income.
In October, Congress changed Social Security rules to disallow the strategies known as “file and suspend” and “restricted application.” Critics believe that these strategies exploit loopholes in Social Security law.
The additional income retirees could gain by waiting to collect benefits drove the popularity of file and suspend and restricted application. Each year you delay claiming Social Security once you’re eligible, your benefit amount increases by about 8%, plus cost of living adjustments, until you reach age 70.
But if one member of a couple delays benefits, his or her spouse can’t collect spousal benefits — unless the couple uses file and suspend or restricted application.
How the strategies work
In the simplest example of file and suspend, one member of a married couple — let’s call her Mary — files for Social Security benefits at the full retirement age of 66, but then suspends them. This allows her husband, John, to immediately start receiving the spousal benefit — which is up to 50% of Mary’s benefit — even though Mary hasn’t yet received payments.
This also allows Mary to receive delayed retirement credits and to take the maximum payout when lifting the suspension at 70.
In cases where both spouses have earned Social Security benefits, the restricted application strategy comes into play. Let’s say that John and Mary are both 66. Mary has long earned more than John, so she qualifies for a monthly benefit that’s much larger than his. If John were to file for benefits today, his monthly benefit would be less than his potential spousal benefit. But by age 70, the benefit he could receive based on his own work record will exceed the spousal benefit he could get now.
In response, Mary files for benefits and immediately suspends them, allowing her account to gain credits toward a higher benefit. Then John files for spousal benefits on her now-activated account. By filing an application restricted to his spousal benefits only (a “restricted application”), John can leave his own account untouched to gain credits as well.
The couple enjoys the spousal benefits John draws until they’re both 70, when Mary ends her suspension and John files on his own account, ending spousal benefits. Both receive their maximum Social Security benefit.
Analysts estimate that some couples using versions of these strategies have increased their lifetime Social Security incomes by more than $50,000, making a significant difference in their retirement resources. But under the new legislation, file and suspend and restricted application are disallowed.
Who the new law affects
People already receiving benefits won’t be impacted by the new rules. Those who aren’t eligible yet, but will reach full retirement age within the next six months, have until April 30, 2016, to file and suspend benefits. And spouses, if born in 1953 or earlier, will be able to file a restricted application on benefits now or in the future.
However, the changes will impact ineligible couples who’ve been counting on using the strategies. These couples should adjust their retirement income projections. To compensate, they may need to invest more, spend less, plan to work longer, or take on part-time jobs during retirement.
The decision on when to file for Social Security benefits can substantially affect future income for you and your spouse, so it warrants serious consideration. To be proactive, start incorporating the rule changes into your retirement planning strategy now.
Image via iStock.