Financial Strategies

Changes To Social Security Will Take Away Some Key Planning Strategies That Couples Used To Boost Their Total Benefits

As part of recent negotiations between Congress and the White House over the budget, major changes to Social Security took away some key strategies that couples could use to boost their total benefits.

File and Suspend

Under this strategy, a higher earner at full retirement age (currently 66) would claim his benefit, enabling his lower-earning spouse to claim a spousal benefit (generally half of the higher earner’s benefit). He then immediately would suspend  his benefit so that he could earn 8% a year in delayed retirement credits until he reapplied up until age 70. In the meantime, his lower-earning spouse would collect monthly spousal benefits.

This new legislation will change the rules so that if someone suspends benefits, no one can collect based on his earnings record. That puts the kibosh on the spouse’s benefit.

That means that people who are getting benefits now under the strategy will continue to receive them, and those who want to try to maximize lifetime family benefits using this strategy will be able to for a while longer. You must be at least age 66 to use this tactic, and the window will probably close around May 1, 2016.

Another useful benefit of the file-and-suspend strategy is that it can greatly enhance the opportunity to collect benefits retroactively. Generally, Social Security will not pay more than six months’ of benefits retroactively. But, for those who file and suspend at age 66, any benefits due from that point on can be collected retroactively. Let’s say you file and suspend at 66 to earn delayed retirement credits, but become ill at 69. In that case, you could collect three full years worth of benefits retroactively if you were willing to forfeit the delayed retirement credits. This change in Social Security wipes out this option.

Restricting an Application

Under the current rules, if a beneficiary applies for benefits between ages 62 and full retirement age, that beneficiary will be paid the highest benefit he is entitled to — whether that is his own benefit or a spousal benefit. By waiting to full retirement age to claim, a beneficiary has had the opportunity to “restrict an application to spousal benefits only.” The reward: You could collect the spousal benefit while allowing your own benefit to grow thanks to 8%-a-year delayed retirement credits.

The new law will eliminate this option for most future beneficiaries.

There’s a caveat: Anyone age 62 or older at the end of 2015 is spared this clampdown. They will continue to have the option, at age 66, to restrict an application to spousal benefits only.

Since the file-and-suspend strategy is disappearing, this will work only if one spouse is actually receiving benefits. In that case, the other spouse could file a restricted application and collect spousal benefits at the same time he or she continues to rack up delayed retirement credits.

Couples in this situation will have to carefully weigh whether the lower earner should trigger his benefit in order for his spouse to claim a spousal benefit. Equal earner couples who both want to delay their own benefits may want to forgo bringing in income through a spousal benefit so that they can both boost their benefits. Couples who have unequal benefit amounts could find it advantageous to have the lower earner claim his benefit and have the higher earner file a restricted application for a spousal benefit.

The Good News

While these claiming strategies will disappear, some key Social Security rules that allow beneficiaries to boost benefits will remain. Beneficiaries will still be able to earn delayed retirement credits of 8% a year up to age 70 if they wait past full retirement age to claim benefits.

Also, a beneficiary will still be able to voluntarily suspend his or her own retirement benefit at age 66 or later, as a beneficiary can do now. That’s good news for someone who claims a reduced benefit early, but later wishes he hadn’t. Once he reaches full retirement age, he can choose to suspend his benefit to earn delayed retirement credits up to age 70 to erase most of the reduction from claiming early.

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