Major Changes to Social Security Filing Strategies (Updated!)

After the market crash of 2000, Congress passed the Senior Citizens Freedom to Work Act. This law was intended to enable people who had previously retired and claimed their Social Security benefit to stop receiving their monthly check while they returned to work and continued earning retirement credits. Doing so would enable the worker to earn more income from employment while increasing their future Social Security benefit.

An unintended consequence of this adjustment was that it enabled U.S. citizens to explore and take advantage of various strategies to maximize their Social Security benefits that were outside the intentions of the law. These strategies became known as the “file and suspend” strategy and the “restricted application” strategy. This morning President Obama and Congress passed the Bipartisan Budget Act of 2015, which is intended to prohibit people from utilizing these strategies going forward.

Let’s dive into the differences between the “file and suspend” and the “restricted application” strategies as well as the steps you may need to take if currently utilizing one of these strategies.

File and Suspend

The file and suspend strategy is when Spouse 1 files for Social Security and then immediately suspends the benefit. This can be beneficial because it could possibly enable Spouse 2 to begin collecting a spousal benefit based on Spouse 1’s work history. Further, it would enable Spouse 1 to collect delayed retirement credits until age 70, getting an 8% per year raise in monthly Social Security payments.

The U.S. government has concluded that this strategy is abusive of the Social Security system in that it is essentially double dipping, as it allows a couple to begin collecting a benefit based on one spouse’s work history while at the same time collecting delayed retirement credits on the same work history.

At this time, it appears this strategy will no longer be allowed after April 30, 2016 -- six months from the signing of the law. However, couples who have begun this strategy within the six-month deadline will be allowed to complete the process. By comparison, after April 30, 2016, couples will no longer be allowed to start collecting a spousal benefit for Spouse 2 unless Spouse 1 is also collecting a benefit.

Steps to Take If This is You

Suppose your spouse is currently collecting a spousal benefit based on your work history, although you are not currently collecting your own Social Security benefit. This would be a scenario resulting from the use of the file and suspend strategy.

If this is reflective of your current situation, you will likely be grandfathered into the program and be allowed to complete the process. Alternatively, if this situation is representative of the Social Security strategy you intend to utilize in the future, you will no longer be allowed to execute this approach unless you start the process by April 30, 2016. Since you must be at least full retirement age to suspend benefits, this option is only available to people who will reach age 66 on or before April 30, 2016. If age 66 is obtained after April 30, 2016, you will either need to start claiming your own benefit in order for your spouse to receive their spousal benefit, or your spouse will not be allowed to collect a spousal benefit until you file to receive your own benefit.

On the other hand, some people who intend to take advantage of the “file and suspend” approach can actually accelerate their implementation of the strategy in order to begin the process before the six-month deadline arrives.

Restricted Application

The restricted application strategy is slightly different from the file and suspend strategy in that Spouse 1 files for his own benefits and never stops collecting that benefit. However, this may allow Spouse 2 the opportunity to begin collecting a spousal benefit immediately while delaying her own benefit until she reaches age 70. Again, this can be beneficial in that it allows Spouse 2 to collect one form of Social Security (the spousal benefit) as soon as Spouse 1 files but also allows the same spouse to continue collecting delayed retirement credits on her own work history. Upon reaching age 70, Spouse 2 can then switch from collecting the spousal benefit, which was based on Spouse 1’s work history, to collecting their own Social Security benefit which has been building delayed retirement credits even during the years when a spousal benefit was being collected.

Again, with a file and suspend strategy, Spouse 2 is collecting a spousal benefit even though Spouse 1 immediately suspended his benefit and is currently collecting delayed retirement credits. With the restricted application strategy, Spouse 1 never needs to suspend the collection of his own benefit and Spouse 2 still gets to collect a spousal benefit while earning delayed retirement credits on her own work history. Going forward, the U.S. government would like to ensure that each spouse is either collecting a benefit (either their own or a spousal benefit) or earning delaying retirement credits, but not both.

However, the restricted application strategy is being phased out over a different time span than the file and suspend strategy. Quite simply, as long as an individual reaches ages 62 before the end of 2015, they will be allowed to utilize the restricted application strategy at any point in the future. Conversely, people who will not reach age 62 before the end of the year will have no opportunity to take advantage of the restricted application strategy.

Steps to Take If This is You

As long as both spouses are at least age 62 before the year ends, then your strategy will likely not be interrupted. However, if one spouse isn’t age 62 before year-end, then your strategy will likely need to be reconsidered.

Speak to Your Financial Planner

If you have any questions regarding how these changes will impact your Social Security benefit, please speak to your financial advisor.

During every financial plan review over the next six months, I will be examining your situation and determining whether these changes affect you. If this law impacts you, I will be exploring any adjustments that need to be made. In the meantime, please don’t hesitate to reach out to me if you have any questions.