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October 28, 2015 at 12:09 PM
(Bloomberg) — The U.S. budget deal comes with a Social Security surprise: a provision that could take a $50,000 bite of out some Americans’ lifetime benefits.
The deal President Barack Obama and congressional leaders have reached would end a strategy, called file and suspend, that retirees are using to get more money out of the Social Security system.
Here’s what will happen if the provision, as currently written, becomes law, and how it could affect you and your clients.
What is file and suspend?
The rules for claiming Social Security are enormously complicated, and a law passed in 2000 made them even more complicated by creating the opportunity to file and suspend.
Generally, the longer you wait to start receiving your checks, the higher your monthly benefit will be. File early and you lock in a lower benefit. Wait until 70 and you lock in your maximum benefit. The monthly check for a single person who files at age 70 can be 76 percent higher than if she had filed early at 62.
Under file and suspend, married workers can file for Social Security and then immediately suspend their benefits. Their benefit checks won’t start arriving in the mail, and the value of their eventual benefits will keep rising as if they hadn’t filed. In the meantime, their husbands or wives can apply for a portion of the spousal benefit they are entitled to once their spouse has filed.
Why is it controversial?
Arguably, couples who file and suspend are double-dipping. They’re getting the extra benefits that come from waiting until age 70 to file, while also accessing benefits early. Boston University Professor Laurence Kotlikoff estimates that file and suspend can boost lifetime Social Security benefits for many couples by $50,000.
