By Kath Suchan, CFP®, CLU®
Last month, Congress passed the Bipartisan Budget Act of 2015 that will, for all intents and purposes, eliminate two Social Security claiming strategies – the “restricted application” and the “file-and-suspend.” Below is a brief description of the two strategies.
- Restricted Application
Restricted application allows the account holder to apply only for the spousal benefit they would be due under dual entitlement rules. At any age beyond Full Retirement Age (FRA), they can switch and receive benefits based on their own earnings record. By delaying the receipt of benefits on their own record, their benefit will continue to increase through delayed retirement credits at approximately 8% per year up to age 70.
File-and-suspend allows the account holder to file for benefits then immediately suspend receipt of benefits to a future date. This opens the door for their spouse to claim the spousal benefit while the account holder’s benefits continue to increase through delayed retirement credits at approximately 8% per year up to age 70.
A Bit of History
In 2000, Congress passed the Senior Citizens Freedom to Work Act. Part of this law was the creation of “voluntary suspension” of benefits. The intent of “voluntary suspension” was to give those who had reached their full retirement age and were already receiving Social Security benefits the option to suspend receiving benefits and therefore earn delayed retirement credits up to age 70.
Beyond the Intent
Although not its original intent, the “voluntary suspension” rule opened the door for the file-and-suspend claiming strategy described above. Basically, someone smarter than me realized that you don’t have to “already” be receiving benefits but you can file and immediately suspend receipt of your benefit. If you combine that with the restricted application, both spouses can suspend receiving benefits on their own record, thereby allowing both to receive delayed retirement credits, while one spouse receives the “spousal benefit.” This was sometimes referred to as the “claim now, claim more later” strategy.
Two Major Changes Under the New Rules
Under the new rules:
- Retirees will only be able to claim spousal benefits if their spouse is already collecting Social Security retirement benefits. Therefore, if an account holder suspends their benefit, they suspend all benefits payable to others based on the account holder’s earnings record (e.g. spouse, dependent children, etc.). This closes the door on the file-and-suspend strategy.
- Retirees will only be able to receive the greater of their own benefit or the spousal benefit they would be due under dual entitlement rules. This closes the door on the restricted application strategy.
On a positive note
It has been estimated by the Center for Retirement Research that the elimination of these two strategies may save the Social Security Administration as much as $9.5 billion per year over the next ten years. Granted, this is not a panacea for the Administration’s woes, but it is a step in the right direction.
Key issues for married couples to consider
These changes do not go into effect immediately. Below are some key issues to consider.
- If you are already receiving benefits, you will not be impacted at all.
- For those of you born on or before April 30, 1949, you will have the option to file-and-suspend before the changes take effect on April 30, 2016.
- For those of you born in 1953 or earlier, you will have the option to file a restricted application and claim the spousal benefit even if the filing does not happen until years from now.
Below is a quick comparison:
Just because these two strategies have been eliminated, delaying benefits up to age 70 may still be a sound option. This is true whether you are married or single. Married couples have the added flexibility have having one spouse start sooner or later than the other. There are still several nuances to consider when claiming social security benefits and some decisions are irrevocable. We recommend that you seek professional advice before making any decisions.