Say "Buh-Bye" to Creative Social Security Strategies

Well, it was good while it lasted. But the House and Senate have set a landspeed record in passing the Bipartisan Budget Act of 2015, and tucked neatly in Section 831 are provisions which kill certain “creative” strategies for claiming Social Security. The legislation is just waiting for President Obama’s signature.

In 2000, the Senior Citizens Freedom to Work Act was signed into law by President Clinton. The rules ended up creating “unintended loopholes” with Social Security claiming strategies known as File & Suspend and Restricted Application. These strategies provided a significant boost to average Americans–Lawrence Kotlikoff estimates up to $50,000 in lifetime benefits for some.

In short, File & Suspend allowed you to file at Full Retirement Age for your Social Security benefits (thereby triggering spousal benefit eligibility) and then voluntarily suspend until a later time up to age 70 when your benefits would be much larger. Benefits are 32% larger at age 70 vs. age 66. Once you filed (and suspended), your spouse could then file a Restricted Application at Full Retirement Age allowing him/her to receive half of your benefit, which they’d continue receiving for life or flip over to their own benefit if larger at age 70.

The new rules are scheduled to take effect 6 months after the legislation is passed (presumably effective May 2016). Undoubtedly, the Social Security Administration will have many details to work out, but here are several key provisions:

If you have an existing File & Suspend and/or Restricted Application arrangement, you’re fine.
If you turn 66 before the rules go into effect (in 6 months), you can still File & Suspend during that time to trigger spousal or dependent benefits. Similarly, a spouse who turns 66 before the rules go into effect can file a Restricted Application for spousal benefits only, and then earn delayed retirement credits for claiming their own larger benefit later (up to 70).
If you are 62 by 2015 year-end, you’ll still be allowed to claim a Restricted Application for spousal benefits at 66 if your spouse is collecting, while earning delayed retirement credits for claiming your own larger benefit later (up to 70).
In 6 months when the new rules are effective, from that point forward nobody will be able to claim spousal benefits under a Restricted Application if their spouse has Filed & Suspended. If for example, a wife files for spousal benefits under Restricted Application, the husband must be collecting his own benefit, not suspending it for larger claim down the road.
In 6 months, the only continuing use of File & Suspend will be for folks who claimed early (before Full Retirement Age) and received reduced benefits. Once they reach Full Retirement Age, they can suspend their benefits and accrue delayed retirement credits to help offset the earlier reduction.
If you turn 62 in 2016 or later, no more Restricted Application to collect a spousal benefit first and then flip to your own benefit later when it would be larger. When you file, you are deemed to have filed for all benefits to which you’re entitled, whether spousal or your own, and will be paid whichever is the higher benefit at that time.

Over the last several years, these creative claiming strategies have become more well-known (which is probably what got them killed!). This legislative development could upset the apple cart for a number of folks who were counting on the extra funds in their retirement plans.

Will this end Social Security planning? No. The strategies still exist for (1) delaying collection of your own Social Security (up to age 70) for a larger benefit, or (2) collecting a spousal benefit under Restricted Application if it’s larger than your own benefit and your spouse is receiving their Social Security. But this certainly changes the chess board…makes it more like a game of advanced checkers.

We will be reviewing the impact and reaching out to any affected SecondHalf clients. Feel free to get in touch with any questions on how the new rules may impact you.