Two Social Security "Loophole" Options Closed

With the recent Bipartisan Budget Act of 2015, Congress has closed the door on two social security claiming strategies that it considered “loopholes.”    The File-and-Suspend strategy allowed a person to delay his or her own benefit in order to get a higher amount later while still allowing a spouse to claim spousal benefits based on the worker’s earnings record.  The Restricted Application technique allowed a person to collect a spousal benefit, while delaying their own benefit to get a higher amount later.    These procedures had been used either separately or together.   Following a brief transition phase, the File-and-Suspend and Restricted Application strategies will no longer be available.  

This news will not mean much to most retirees, because not many would have used these strategies anyway.  They were most popular with people who could afford to delay social security benefits and who understood the arcane rules.   However, people were increasingly becoming aware of the opportunity and taking advantage of these strategies.    Under the new rules, the File-and-Suspend provision will end, but some people can still implement the strategy if they act quickly.  The following specific circumstances are required: If you will be age 66 by April 29, 2016 and want to delay the start of your benefits and you have a spouse who might want to claim only spousal benefits while earning delayed credits on their own record, then you must File and Suspend by April 29, 2016 in order to be “grandfathered” under the old rules.  

Some people will also be grandfathered to file a Restricted Application in the future, but no specific action is required now.   If you were age 62 by January 1st this year, you preserve the right to file a restricted application for just spousal benefits at your Full Retirement Age (FRA) which would be 66 in such a case.  For example if you are 63 now, you would still be able to claim benefits on your spouse’s record at age 66, while receiving delayed credits in order to switch to a higher benefit amount at age 70 based off your own work record.     Unlike the elimination of File-and-Suspend, you don’t have to take any proactive steps now. 

The most important thing to do now is to evaluate your own situation to see how these rule changes might influence your filing decisions.  My wife and I are 60 and 61 respectively and would have been good candidates for the File-and-Suspend and Restricted Application strategies in a few years under the old rules.   Since we are not within the age range to be grandfathered, these specific strategies will no longer be an option for us.   Even so, we still retain the ability to delay our own retirement benefits until as late as age 70, if it makes sense for us.   Alternatively, we could start as early as age 62, if we want.    The decision could have a significant impact over our lifetimes.  We could both file at 62, or both wait until 70, or we might each choose a different age anywhere between 62 and 70.  There are many possible combinations.  This might sound complicated, but our decision will be easier than for some folks, because our benefit amounts and ages are pretty close together.  People with a wider age gap or who have a large difference in historical earnings face a more difficult decision.     

Everyone’s claiming strategy should also consider work status, tax situation, sources of income, investment assets, risk profile, long-term goals, family health history and other factors.   In other words, the decision about when to begin social security should be integrated with other aspects of your financial plan.    In my 2012 blog post, Making Smart Social Security Decisions, I wrote that you cannot know in advance the optimal strategy because you don’t know how long you will live. That said, you can make a smart decision that best fits your personal situation. 

Should the new budget bill have struck down these claiming strategies?  One of the underpinnings of the social security system has been that when a person is entitled to multiple benefits, they could choose the higher amount.   Used independently or in concert, these two strategies utilized this principle to potentially enhance the total amount of social security benefits.    There are other situations still allowed within the system to take the higher benefit amount when qualifying for more than one benefit.    Further, very few people actually used the strategies according to SSA data and the impact on the federal budget was negligible.    

In my view, this was a way for Congress to pretend it’s doing something positive to avoid solving the real problem.  If our lawmakers really want to do something to shore up the social security system, they could start by not pilfering the assets of the Social Security Trust Fund!  For years, the government has withdrawn all of the receipts from payroll taxes and spent them on other things.  They have replaced them with a giant stack of IOU’s.   The system is a huge Ponzi scheme with the outgoing benefits to retirees paid from new contributions from current workers.    This has allowed benefits to continue to be paid, but unless something is done to fix the system, benefits could be reduced in the not-to-distant future.

The Social Security Retirement System is critically important to millions of Americans who rely upon it for a sizable portion of their income.  Although I can’t be totally confident, I do think it will get fixed eventually, so that promised payments will be made.   As with many things in life though, I believe you should focus on what you can control and not worry about what you can’t.  To a great extent you can control how much you save for retirement and how well you invest your savings.  Sensible planning can greatly enhance your financial security and retirement lifestyle.   

It’s said that when one door closes, another opens.  Making smart social security decisions is still an important part of retirement planning despite the elimination of two claiming strategies.  You might want use this opportunity to take a closer look at your social security filing strategy.