Baby Boomer Social Security Shocker
Two popular methods of claiming Social Security benefits are disappearing thanks to the budget deal worked out between Congress and the White House. The House of Representatives has passed the measure and the Senate is widely expected to follow suit.
“File-and-Suspend” and “File-and-Restrict” are both used by couples to boost the amount of Social Security they receive together. They were the unintentional results of a hastily-written piece of legislation called “Senior Citizens’ Freedom to Work Act” passed in 2000 when Bill Clinton was president.
The main intention of this Act was to remove the penalty on individuals who were receiving Social Security benefits and income from a job. If your annual earnings from work exceed a certain amount, Social Security stops paying you some - and potentially all – of your benefits for the year. This law eliminated the benefit hold-back once an individual reached full retirement age (FRA).(1)
It didn’t take long for some smart folks to realize that proponents of this Act threw it together very quickly, opening the door to additional ways to claim Social Security. These have become favorites of married couples who want to boost their joint benefit from Social Security.
Under this strategy, one spouse (generally the higher-earner) files for Social Security when he reaches full retirement age (FRA) and immediately “suspends” his benefit. In effect, he is telling Social Security, “Don’t send me a check.”
Because he has technically filed, his wife is now entitled to a benefit based upon her husband’s work history. Each year that the husband delays taking his benefit, the amount increases by 8% due to something called the Delayed Retirement Credit (DRC). At 70, when DRCs stop, the husband tells Social Security to start sending his monthly check. Assuming his full retirement age is 66, postponing the start of his benefit for four years means the husband’s check will be at least 32% larger.
Six months after the 2016 federal budget bill is signed into law, File-and-Suspend disappears. However, if you meet the age requirement and this strategy makes sense for you, there is still an opportunity to use it. According to attorney Joan Entmacher, a Social Security specialist at the National Women’s Law Center, “People who have already done this or do this within 180 days… won’t be affected.”
This is a popular strategy for couples where both have worked and earned Social Security benefits. Let’s assume the wife is the higher earner this time. Under this method, the husband – the spouse with the lower benefit – files and begins receiving Social Security. The wife waits until she is Full Retirement Age (assume this is 66) and then files just for her 50% spousal amount. This enables her to delay claiming a benefit based upon her own earnings record, which can now earn DRCs.
The couple receives these two benefits for four years. As she approaches age 70, she tells Social Security to drop her spousal benefit and, instead, begin paying her own. By waiting four years to take this, it has increased by at least 32%. Unless you will be at least 62 years old by the end of this year, File-and-Restrict is no longer an option. Entmacher says this expiration also applies to divorced spouses who might want to use this strategy.
Closing the Wrong Loophole?
The budget bill calls these changes “loopholes.” Critics say they were mainly used by “upper-income” beneficiaries to game the system and get more money out of Social Security. But in many parts of this country it’s not a luxury, but a necessity for both spouses to work in order to provide for their family and educate their children. (Ask anyone who lives in California or near New York City or Washington, D.C. or any other major city what they pay in taxes and commuting costs.)
Say that, as a result of two lifetimes spent working (missing soccer games and piano recitals), husband and wife end up with a Social Security benefit of $1,800 and $800 at Full Retirement Age; hardly what most of us would consider “wealthy.”
By employing File-and-Suspend, the lower-benefit spouse could receive $900/month at FRA instead of $800/month. By waiting until age 70 (and perhaps continuing to work part-time), the spouse with the higher benefit receives $2,376/month.(2)
Keep in mind that the spouse who delays the start of his/her benefit is taking a risk. If he or she dies in the interim, benefits that could have been received up to that time are forfeited.
Closing these two strategies is not going to solve Social Security’s long-term funding gap! This is the real issue that Congress and the president should have addressed. Raising the Social Security tax rate from 12.4% to 15.1% means that everyone – current as well as future beneficiaries – receives their full benefits for the next 75 years.
Since employers and employees split this tax, each would pay half – or 1.3% more; $13 per year more for every $1,000 you earn and we fix this “problem!”
But no politician is ever going to bring this up because he or she would have to utter the phrase “raise taxes.” And you simply don’t use those words if you want to be elected.
But when the non-partisan National Academy of Social Insurance surveyed ordinary Americans and explained the situation in these terms, the overwhelming response was, “Count me in!” (3)
We need real, not politically motivated, changes to strengthen Social Security for generations to come.
1. It still applies if you are under FRA. 2. This does not take potential cost-of-living increases into account. 3. October 2014. “Americans report strong support for Social Security and are willing to pay more in taxes to stabilize the system’s finances and improve benefits.”