Looming changes to the Social Security system meant to shore up its pending insolvency have created a renewed sense of urgency for maximizing Social Security benefits for high net worth clients. Because these clients are often financially secure enough to delay their Social Security benefits past the normal retirement age, when they can reap a higher benefit level, they have become the likely target of the impending Social Security reform. There is a strong possibility that the powerful file and suspend strategy for maximizing Social Security benefits will not survive the transition, so it is time to engage your retirement-aged clients in a Social Security planning discussion before it is too late.
The “file and suspend” strategy
Because it is in the government’s interest to encourage workers to delay collecting Social Security benefits, your clients who wait past the normal retirement age to begin collecting are rewarded with an increase in benefits for each year benefits are delayed. This results in a higher benefit being paid to the client, but in some cases, the government comes out ahead when the client does not live long enough to begin collecting benefits.
In some instances, if your client has reached full retirement age but wishes to delay collecting benefits in order to reap the higher benefit level in later years, the client can take advantage of a strategy known as “file and suspend.” This strategy allows a spouse to begin collecting spousal benefits without jeopardizing the amount of the working spouse’s retirement benefit. The working spouse simply files for benefits and then makes a subsequent filing to suspend these benefits.
During the time that the benefits are suspended, the working client earns delayed retirement credits, which increase the eventual benefit level by 8 percent for each year in which benefits are suspended. The taxpayer must begin to collect benefits by age seventy, by which point the benefit level can be increased substantially.
A working spouse may collect spousal benefits but can similarly suspend any work-related benefit, so that it too can continue to grow until the working spouse reaches age seventy. At that point, both spouses would be entitled to a larger benefit and would still have collected some Social Security income in the intervening years.
The file and suspend strategy removes some of the upside potential that the government can realize through encouraging workers to delay collecting benefits—namely, the possibility that those benefits will never be collected, thus increasing the Social Security fund level. As a result, proposals for reforming Social Security have focused on eliminating the file and suspend strategy.