File & Suspend, NO MORE
Just like that, two strategies that have helped you take advantage of Social Security spousal benefits have been wiped out. As part of the budget deal struck by House Republicans and President Obama to raise the U.S. debt limit, two key Social Security “loopholes” have been closed: file and suspend and restricted application for spousal benefits. The ban on file and suspend will start with suspension requests submitted 180 days after the enactment of the bill. The ban on filing a restricted application will apply to anyone who turns 62 in 2016 or later. As of Wednesday evening the House had approved the bill. The Senate is expected to vote soon, and Obama’s signature is likely. Here is the full text of the bill, HR 1314 and the amendment revising the effective date of file and suspend.
Here is what it means and what to do.
File and suspend and restricted application for spousal benefits are going away. I will explain exactly how and why this is happening later in this article, but the burning question for now is this: How will these changes affect you?
File and suspend
As you know, a fundamental requirement for spousal benefits is that the worker spouse must have filed for his/her own benefit before the spouse can file for a spousal benefit off his/her record. File and suspend is used when the spouse wants to file for the spousal benefit before the worker is ready to claim his own benefit. If Jill wants to start her spousal benefit before Jack is ready to claim his benefit, Jack files for his benefit, thus entitling Jill to her spousal benefit, then he immediately suspends his benefit in order to build 8% annual delayed credits. This strategy was ushered in by the Senior Citizen Freedom to Work Act of 2000. The intent of this law was to allow people to suspend their benefit in order to build delayed credits if they continued to work past full retirement age. An outgrowth of it was the popular file-and-suspend strategy, which allows a spouse to start spousal benefits four years earlier than otherwise would have been allowed.
This “loophole” will close with suspension requests submitted 180 days after the passage of the budget act. Voluntary suspension will still be allowed. But for people filing and suspending after that date, there can be no spousal benefits—or other dependent benefits—paid off a suspended benefit. In addition, the lump sum loophole is being closed. A person can still file and suspend, but when benefits are resumed, they will be paid going forward, with no lump sum and with the benefit amount being figured as of the date of resumption, including delayed credits. The closing of these loopholes now means that voluntary suspension will be used for its original purpose: to allow a person who has filed for benefits to change his mind and suspend benefits in order to build delayed credits. (Note: voluntary suspension still must be done at FRA or later.) Now there will really be no reason to file and suspend; a person who wants to delay would simply wait until age 70 to file.
Restricted application
The claim-now-claim-more-later strategy, also called filing a restricted application for spousal benefits, is used when a higher earning spouse—one whose own benefit is larger than his spousal benefit—wants to receive just the spousal benefit while his own benefit builds delayed credits. This is probably not what was intended by the 1939 amendment allowing a nonworking spouse to receive 50% of the worker spouse’s benefit as her spousal benefit. But when combined with a rule allowing a person to restrict the scope of their application when deemed filing no longer applies (i.e., at FRA or later), it allows anyone to take a spousal benefit while delaying their own benefit. It has been a key strategy to give married couples and divorced individuals as much as $60,000 in spousal benefits while allowing their own benefit to build delayed credits.
Congress is killing the restricted application strategy by extending the deemed filing rule to age 70. Under the deemed filing rule, if a person is entitled to a retirement benefit and a spousal benefit at the time they file for benefits, they must file an application for both benefits and will be paid the larger of the two. This means that if their own retirement benefit is larger than their spousal benefit, they will not receive a spousal benefit. Under current law, deemed filing applies only before full retirement age, thus opening up the ability to file a restricted application at FRA. Following implementation of the budget act, deemed filing will continue past FRA, thus disallowing the filing of a restricted application for spousal benefits at any time. It will be effective for anyone turning 62 in 2016 or later. This means anyone turning FRA between now and 2020 (i.e., will be over 62 on December 31, 2015) would still be able to file a restricted application. If you are older than 62 by December 31, 2015, you can still file a restricted application when you turn FRA. But this strategy will not be available to anyone who turns 62 in 2016 or later.
Combination strategies
Because of the differing effective dates, planning will be somewhat tricky. As just noted, anyone who will be over 62 on December 31, 2015 will still be able to file a restricted application. But if that strategy depends on the other spouse filing and suspending, it won’t work. After April XX, 2016 (six months after the enactment date), spousal benefits will not be paid on a suspended benefit. However, if the restricted application will be filed for a spousal benefit based on a worker who has filed and is receiving her own benefit, it will work.
Example 1: Jack and Jill are both 64. Jack’s PIA is $2,600;
Jill’s PIA is $800. Jill files for her benefit and is receiving 87% of $800, or
$696. In two years, Jack files a restricted application for his spousal benefit
and receives 50% of Jill’s PIA, or $400, from age 66 to 70. At age 70 he
switches to his own maximum benefit. The new law does not affect this strategy
because Jack is older than 62 now and Jill is receiving her benefit (i.e., she
has not suspended it).
But if the worker spouse would be suspending, it won’t work:
Example 2: Tom and Tracy are both 64. They are both high earners
with PIAs of $2,600. In two years, Tracy will be 66 and eligible to file a
restricted application for her spousal benefit. However, Tom wants to delay his
benefit to age 70. The effective date for the ban on file and suspend has
already passed. Either Tom will have to take his own benefit (and forego four
years of delayed credits) in order to give Tracy the spousal benefit, or Tracey
will have to forego four years of spousal benefits in order to give Tom his
maximum delayed credits.
Two high-earning spouses under age 62 are out of luck on two counts:
Example 3: Sam and Sarah are both 61. They are both high earners
with PIAs of $2,600 each. Prior to the new law you would have recommended that
they both file for their own respective benefits at 70, with Sam filing and
suspending at 66 and Sarah filing a restricted application for her spousal
benefit at 66. This would give them $62,400 in spousal benefits from age 66 to
70 ($1,300 x 48 months) and allow them each to increase their own retirement
benefit by 32% compared to taking it at FRA. Once the budget bill becomes law,
this strategy will no longer be allowed. The spousal benefit will not be
available because Sarah will be subject to deemed filing when she files at 66.
She will be forced to take her own higher benefit. File and suspend will also
not be available because Sam turns 62 after 2015, but this would be moot
because Sarah can’t take the spousal benefit anyway.
What about divorced people—specifically divorced women, who generally are not considered among the “wealthy” taking advantage of “loopholes.” Unfortunately, if they will turn 62 in 2016 or later, they will not be able to file a restricted application for divorced-spouse benefits. That’s too bad, because divorced women need all the help they can get—although it could be argued that if they are younger than 62 now, presumably they still have time to work and save so that they could still delay their own benefit to age 70 in order to maximize lifetime benefits. The good news is that anyone over 62 now should still be able to receive a divorced-spouse benefit: the ban on restricted applications will not apply to them, and it is not necessary for the ex-spouse to file and suspend to entitle her to the spousal benefit (as long as he is over 62 and the divorce occurred over two years ago). (Note: There is still a possibility of divorced people being exempted from some of these rules. Stay tuned.)
What about widows? From what I can tell, survivor benefits are not affected. Because survivor benefits are not included in the deemed filing rule, it still should be possible for a widow to file a restricted application for her survivor benefit at any age. So the advice for widows will be the same as always: compare the two benefits, that is, the survivor benefit if taken at FRA and the retirement benefit if taken at 70 (PIA x 1.32). Take the higher amount last and the lower amount in the meantime.
How did this come about?
Over the past year there have been rumblings about “wealthy” people taking advantage of certain “loopholes” to get more out of the Social Security system. The publication of Larry Kotlikoff’s book, Get What’s Yours: The Secrets to Maximizing Social Security seems to have escalated the cry to close such loopholes as file and suspend and restricted application. Although legal, both of these strategies utilize spousal benefits in a way that was not intended by the 1939 amendments allowing a nonworking spouse to claim 50% of the worker’s primary insurance amount as a spousal benefit.
Alicia Munnell’s article, “Let’s Close Down Social Security Gaming,” published in May 2015, waved a big red flag that these strategies were doomed. Alicia Munnell is director of the Center for Retirement Research at Boston College, whose mission is to “produce policy-relevant research on Social Security and retirement income issues, educate and train new researchers in the field of retirement income policy, and disseminate research findings to the research community, policymakers, and the general public.”
In other words, she holds a lot of sway among policymakers. It was largely due to her analysis of the “do-over rule” that led to its elimination in December of 2010. Under that rule, a person could file for Social Security at 62, receive eight years of benefits and then withdraw the application at age 70, repaying benefits without interest and restarting a new benefit with maximum delayed credits. It was her argument that only the wealthy, who didn’t need Social Security income, were able to take advantage of this “free loan from Social Security” that could cost the system as much as $6 billion to $11 billion a year.
That brief was written in 2009. Also written in 2009 were two other briefs, Strange But True: Claim and Suspend Social Security and Strange But True: Claim Social Security Now, Claim More Later. In each brief she described the strategy and estimated the effect upon the system if it were implemented by everyone eligible to do it. Claim and suspend (now popularly known as file-and-suspend), in which the higher earning spouse files for his benefit to entitle his lower earning spouse to her spousal benefit and then suspends his benefit to build delayed credits to age 70, would cost the system about $1 billion a year—a rather small amount considering how much it could help baby boomers have a more secure retirement. Her conclusion in 2009:
Fortunately,
the cost to Social Security of enhancing the claiming strategies for one-earner
couples is modest—probably less than $1 billion per year given actual claiming
behavior. This annual cost is swamped by the benefits of allowing people to
increase their ultimate Social Security check. The challenge is to make sure
that everyone knows that “claim and suspend” is an available option.
The other strategy, “claim Social Security now, claim more later,” now popularly known as filing a restricted application for spousal benefits, would cost more: about $10 billion a year. Here, Munnell was less accepting of this strategy that is most often used by people with higher incomes to collect spousal benefits while their own benefit builds delayed credits. Her conclusion:
This financial
crisis has demonstrated the importance of Social Security as the backbone of
the retirement income system. Thus, restoring balance to the Social Security
program, which faces a deficit over the next 75 years, should be a high
priority. This process will involve careful scrutiny of all provisions to
assess whether they are consistent with the basic goals of the program. It is
not clear what public policy goal the “claim now, claim more later” option
addresses. Moreover, the main beneficiaries are two-earner couples, and a
significant portion of the benefits goes to those with higher incomes. The
potential cost in 2006 was about $9.5 billion. This cost will climb sharply as
large numbers of baby-boom couples start retiring.
In her 2015 article Let’s Close Down Social Security Gaming, she made an outright call for file-and-suspend and restricted application strategies to be eliminated.
Social
Security is the backbone of our retirement income system. It is also facing a
75-year deficit. Restoring balance to this program should be a high priority.
In the meantime, Congress should carefully scrutinize all provisions to assess
whether they are consistent with the basic goals of the program. None of the
“Strange but True” strategies pass muster. Social Security got rid of one, now
Congress needs to get rid of the other two.
How can they do this?
The Social Security Act has been changed many times since its initial enactment in 1935. Here is a history of major legislative changes, ranging from the initiation of family benefits in 1939 to the Senior Citizen’s Freedom To Work Act in 2000, which authorized the voluntary suspension of benefits. These major legislative changes were passed by Congress. That’s why it was rather shocking to see the do-over rule crushed virtually overnight in December 2010, with no Congressional debate. As it turns out, there are several components to Social Security program rules. In addition to the Social Security Act and the regulations that comprise Chapter III of the United States Code of Federal Regulations, specifically Part 404 which deals with old age, survivors, and disability insurance benefits, rulings can be handed down by the Social Security Commissioner with no debate and no public comment.
Commissioner rulings are published in the “Notices” section of the Federal Register under the authority of the Social Security Commissioner and are effective upon publication. The abolishment of the do-over rule appeared in the December 8, 2010, edition of the Federal Register and became effective immediately thereafter. All those people who had filed at 62 with the intention of withdrawing and repaying at 70 found themselves stuck with a permanently reduced benefit (although they could rectify the situation by suspending at full retirement age).
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