The only constant is change. Do a little retirement planning, and you’ll soon bump into that truth. Earlier this month the U.S. government gave us another reminder: The Bipartisan Budget Act of 2015 made some of the most significant changes to Social Security benefits in years. Lawmakers unexpectedly tacked the changes onto an emergency measure to avoid a U.S. debt default, catching many observers by surprise. Though, since Social Security is a primary driver of U.S. debt, maybe we should be grateful our contentious government could muster some progress on its longstanding financial issues….
So, what has changed? The “file and suspend” and “restricted application” claiming strategies, obscure and complex options once available to two-earner couples, will soon belong to the past. These strategies were an unintended consequence of a law passed in 2000 to encourage working during retirement. They might have remained vague technicalities but for the introduction of software and books aimed at “getting what’s yours” out of Social Security. The loopholes grew in popularity.
An analysis by the Boston College Center for Retirement Research calculated that if all eligible couples used the strategies, it would cost Social Security about $10 billion/year. The Committee for a Responsible Federal Budget called them a loophole that “achieves no policy goal, and appears the result of a historical accident.” Lawmakers apparently agreed, and axed these strategies as part of the recent budget deal.
What exactly were these strategies and what was the payoff for couples who took advantage of them? Let’s take a quick look at the old law, before we assess the new landscape for Social Security claiming….
Anatomy of the Old File and Suspend/Restricted Application Strategies
I was familiar with these strategies before the recent changes. And now I’ve read a dozen new descriptions of them, and the changes. Yet I’d still have a hard time explaining them off the top of my head. I can’t escape the feeling that the government initially created a fistful of rules to do the work of a few, and has now layered more rules on top of the original gaggle! A detailed written summary would take a page and would probably put you to sleep in the process. So we’ll keep it brief….
In essence, the old law allowed one spouse in a working couple to file for Social Security in a way that gave the other spouse access to their “spousal” benefit at full retirement age. This other spouse would then collect that spousal benefit for up to four years, until age 70, while their own retirement benefit was suspended and growing by 8% a year. At age 70, this other spouse would then switch to his or her full benefit. Thus, by submitting the right paperwork in the right sequence, you could gain up to four years of spousal benefits at no cost.
With the new law, Congress has killed off the ability to collect spousal benefits while still earning delayed retirement credits. The new “deeming” rules prevent you from filing for just spousal benefits while leaving your own benefits untouched, even beyond full retirement age. And the new “suspension” rules prevent you from suspending your own benefits without suspending the benefits to others based on the same earnings record. Thus the old file-and-suspend and restricted application strategies for the purpose of generating “free” spousal benefits, no longer work.
That’s most of what you and I and most people need to know about the new rules. I don’t pretend to be an expert on taxation or Social Security. If you need more detail than my broad, non-technical summary, then please consult the experts who make it their business to understand the government’s arcane regulations:
Two of my favorites are Michael Kitces, whose detailed article was one of the first and most comprehensive on the recent changes. And Mike Piper, whose concise post is one of the most readable.
I also highly recommend Mike’s short, clear book Social Security Made Simple
on this subject. It’s well worth the low price to get a handle on your Social Security options. Just note that he is hard at work on revisions to the book, bringing it in line with the new law. Keep an eye on his blog for related announcements.