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 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.
As part of the 2016 budget, President Obama and Congress intend to prohibit people from utilizing these strategies going forward. At the time of this publication, these proposed changes are not yet law. Although both the House of Representatives and the executive branch have signed off on these bills, they still need to be approved by the Senate before the laws go into effect. However, this is expected to occur with minimal modifications within the first week of November.
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 the individual’s spouse 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 that this strategy will no longer be allowed beginning six-months from the date the law is passed. Further, it is currently unclear what action will be taken against those who have already utilized this strategy. It currently appears possible that couples who have already started this strategy will be allowed to complete the process. Alternatively, it is possible that couples who have started this process will no longer be entitled to the spousal benefit they are currently receiving until Spouse 1 begins claiming his Social Security benefit, at which time the spousal benefit for Spouse 2 would continue. In a worse-case scenario, it is possible that the U.S. government may attempt to recollect any benefits that are no longer allowed from couples who have already taken advantage of this strategy. (I believe this is the least likely result, as it would be hard to take money away from people who have already collected it.)
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 situation, then significant adjustments might need to be made as this law becomes more concrete. It is possible that you will either need to start claiming your own benefit in order for your spouse to continue receiving their spousal benefit, or your spouse will need to stop collecting any benefit until you file to receive your own benefit. Again, these kind of adjustments will likely be implemented six months after the bill is finalized.
Alternatively, and depending on how the law is agreed upon, it is possible that some people who intend to take advantage of the “file and suspend” approach actually accelerate their implementation of the strategy in order to begin the process before the six-month deadline arrives.
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 still be beneficial in that it allows 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. 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.