In a bid to cut costs and eliminate loopholes in its recent budget agreement, Congress eliminated two methods used by married couples to claim Social Security benefits.
Within six months of the enactment of the Bipartisan Budget Act of 2015, changes will go into effect for the advanced strategies of “file and suspend” and “restricted application,” to claim Social Security benefits.
These two strategies are often utilized by married couples looking to maximize their Social Security benefits. Couples who are 66 years or older could delay benefits while one spouse collects spousal benefits. It is estimated that combined, these strategies could add another $60,000 to a couple’s lifetime income.
The changes will affect those who have not reached 62 years of age by the end of 2015 and those who have not already begun a file and suspend claim prior to six months following the law’s enactment.
File and suspend
This strategy is often used by couples with one spouse who has a higher earnings record than the other. The primary earner waits until full retirement age to file for Social Security benefits. This allows the other spouse to file and begin collecting spousal benefits. After filing for retirement benefits, the primary earner immediately suspends benefits to take advantage of the delayed retirement credit and increase benefits by about 8% annually. Then, at age 70, the higher-earning spouse begins receiving the maximum possible retirement benefit for life. This strategy also preserves the highest possible survivor benefit.
Six-month window
The file and suspend strategy is still available for six months after the law is enacted. After that, the option is eliminated. Spousal benefits will not be available until the working spouse files and begins receiving his or her own retirement benefits.
Restricted application
This strategy is typically used by married couples with similar earnings records. The lower-earning spouse files for retirement benefits at full retirement age. This allows the higher-earning spouse to restrict his or her application for spousal benefits only while delaying his or her own retirement benefits (preferably to age 70 if possible). Workers who can delay taking their benefits can take advantage of delayed claiming credits that result in a benefit increase of about 8% annually until age 70. At that age, workers can file to receive their individual benefits at the highest monthly amount. This strategy also preserves the highest possible survivor benefit.
What changes
The restricted application strategy is being phased out. If taxpayers reach age 62 by the end of 2015, they may still use the restricted application strategy once they attain full retirement age at 66. After that it will be eliminated.
Additional considerations
The law does not change widow and widower benefits. A widow/widower can still choose to receive the widow/widower benefit and let his or her own benefit accrue delayed retirement credits. Also, they can use this filing strategy as early as age 60 and not have to wait until full retirement age.
Voluntary suspension is also still available. Retirees who opted to claim Social Security benefits early can suspend benefits at full retirement age in order to receive a higher benefit in the future. For example, if a retiree claimed retirement benefits at age 62, suspending benefits at age 66 until age 70 would result in a retirement benefit roughly equivalent to what he or she would have received at full retirement age.
Additional clarity will likely be needed for divorced couples filing for benefits. The bill does not specify what would happen to an ex-spouse’s benefits if a divorced working spouse suspends his or her own benefits.
Because of the timing of implementation of the new law, couples who were planning to use these strategies in the coming year may want to consult with their advisor to determine how the new law will affect their income in retirement.
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