After more than a month of working with congressional staffers, Social Security has issued guidance on the strategies that married couples can use when filing for retirement benefits. Changes aimed at closing so-called “unintentional Social Security loopholes” were included in the Bipartisan Budget Act passed in early November. However, the wording left certain things unclear and retirees in limbo about their options.(1)
Frankly, although this announcement was issued by the Social Security Administration, I don’t believe for a second that the SSA wrote it. It is simply too politically-charged.
Here’s a sample:
These loopholes are often described as “aggressive claiming strategies” because they involve higher-income individuals who follow a deliberate claiming pattern – often under the advice of financial planners – to exploit benefits in a manner that is not the norm (or an option) for most middle class workers.
The language- as well as the assertions made- reek of Congress and the Administration trying to justify revoking what Congress itself inadvertently made possible 15 years ago when it passed The Senior Citizens Freedom to Work Act.
Because that legislation was poorly worded, it opened the door for married seniors to get creative about how they could maximize their Social Security benefit as a couple. Though the Obama Administration has consistently tried to characterize these strategies as sneaky or perhaps “cheating,” they are completely legal. Calling them “loopholes” is akin to saying that taking advantage of the tax deduction for a charitable contribution is a “loophole.” These literally became available due to an Act Of Congress. By definition, that makes them legal!
It’s also a stretch to state (repeatedly) that these strategies are primarily employed by upper-income retirees. What’s the justification for this? I’ve never seen any statistics based on household income that analyze who has used these options. Furthermore, one could argue that these claiming strategies have been more advantageous to middle-class retirees.
Moreover, maligning financial advisors for allegedly helping clients maximize their Social Security benefits is ludicrous. Isn’t this exactly the kind of advice you expect from your financial advisor? When tax preparers point out ways that clients can reduce their income tax burden, does the government suggest that they are acting in an deceitful or unpatriotic manner?
By the way, on page two of this announcement we learn that “as of December 2014, less than 0.2% of …beneficiaries were using these aggressive claiming strategies.” That works out to 96,000 out of more than 48 million retirees. (48,076,066 x .002.)
Hardly a tsunami.
The reality is that retirees of all income levels learned about these perfectly legitimate claiming options via the mainstream media. Dozens of books, including The Complete Idiot’s Guide to Social Security, have explained them. AARP advocated using them. And let’s not overlook the primary source of information about how to use them to your advantage: Social Security’s own website and personnel.
Kiss File-and-Suspend Good-bye
One of the strategies targeted by these changes is called “file-and-suspend.” It allows Spouse A to qualify for a benefit based upon Spouse B’s earnings record even though Social Security is not actually sending Spouse B a monthly benefit check. When Spouse B approaches age 70 s/he instructs Social Security to start paying their benefit, which can be as much as 32% larger. That’s because for each year beyond your full retirement age (FRA) that you postpone the start of your own benefit, it increases 8% thanks to the Delayed Retirement Credit (DRC).
The last date that you can opt to use file-and-suspend is April 30,, 2016. And you must be at least FRA to do so. You can still “suspend” your benefit after that date, but anyone who is receiving a benefit based upon yours will see their checks stop as well.
File-and-Restrict Gets the Boot
The other strategy some retirees have used to increase their joint benefit is called “file-and-restrict.” At full retirement age, they file for benefits but instruct Social Security to only pay their 50% spousal amount. At age 70, they switch to the benefit based upon their own work record. As with file-and-suspend, by delaying the start of their own benefit, it can be as much as 32% higher.
Unless you are at least 62 years old by the end of this year, you will not be able to use the file-and-restrict strategy. Since you have to be FRA to do so, this will be completely phased out in four years.
According to Social Security’s announcement:
The formula for calculating DRCs for workers who delay retirement is designed to be “actuarially fair” – meaning the worker would be expected to receive the same amount of benefits over their lifetime as they would if they did not delay retirement – and assumes that no spousal benefits are being provided when the worker is not receiving benefits. The loophole subverted that actuarial fairness, giving those who use this claiming strategy more in benefits than was intended. (Emphasis added.)
Balderdash! Gibberish! Hogwash! Nonsense! Rubbish! Baloney! Poppycock!
It is simply not true that the formula for the Delayed Retirement Credit “assumes that no spousal benefits are being provided.” If you postpone the start of your benefit past your full retirement age, you receive exactly the same increase whether you are married or not!
Let me make this perfectly clear: your marital status has zero impact on how much of an increase you receive due to the Delayed Retirement Credit.
How about the use of the word “subverted?” Folks, we are talking about ordinary Americans using a legal option to increase their Social Security benefit amount. You’d think this announcement was referring to some deadly international espionage ring instead of people like your grandparents or the 70-year-olds who live down the block!
Instead of labeling retirees “aggressive” and “subversive,” why not simply say “Congress screwed up when it passed badly-worded legislation back in 2000 and now we’re fixing the dumb mistake they made.”
No, that would be honest.
What I do have a problem with is unfairly smearing law-abiding citizens as “aggressive” and suggesting that only wealthy individuals with financial advisors have been gaming the system to gain an unfair advantage.
And just to be clear, I don’t think the wording of this announcement came from Social Security.
I can’t wait to read what comes out to explain how, thanks to sloppy wording of the 2015 Budget Act, Congress took away benefits for divorced spouses – benefits that were specifically written into the 1983 Amendments to Social Security. Hopefully it won’t take them 15 years to correct that mistake.
1. Despite this announcement, questions still remain about what Congress intended when it wrote this section of the law. For instance, if a couple wishes to use the “file-and-suspend” strategy by the April 30deadline, must both spouses file by that date or just the one who is “suspending?”