For a decade and a half, the “File and Suspend” strategy was an excellent way for dual income couples to max out lifetime Social Security income. A top choice for high and low earners alike, it provided a significant boost compared to simpler spousal strategies. The same was (and still is) true for the restricted application, a somewhat less effective way for a higher earning spouse to collect a check while earning delayed retirement credits.
With the passage of the 2015 Bipartisan Budget Act, however, File and Suspend came to an end, and the strategy was completely phased out by May 1, 2016. The restricted application was also set to expire, and it’s now only available for seniors born before 1954.
While some clients never knew about File and Suspend, others were counting on the extra income it would provide. If you’re serving clients who planned to do so – particularly those who haven’t seen an advisor in the last couple of years – it’s important to understand these strategies: how they worked, how they came to be, and what alternatives you should advise.
File and Suspend and the Restricted Application
How exactly did these strategies work? In the case of File and Suspend, a higher-earning spouse would file for benefits at full retirement age and immediately suspend. That would allow the lower-earning spouse to claim and collect spousal benefits, while the higher earner accumulated delayed retirement credits.
For example, Bill reaches FRA at 66, files for his $2,000 monthly benefit and suspends. His wife, Betty – also age 66 – then files for spousal benefits and collects a COLA-adjusted $1,000 for the rest of her life (50 percent of Bill’s benefit). Once Bill reaches 70, he’ll get $2,640 per month, or 32 percent extra, for the rest of his life, as well.
With the restricted application, on the other hand, the lower earning spouse claims first (and doesn’t suspend). The higher income spouse then selectively collects half the lower earner’s benefit between FRA and age 70, while they let their own benefit grow.
Using the prior example, Betty might collect her own benefit of $800 at age 66, and Bill would get $400 on a restricted application. Thus, the couple would bring in $1,200 total per month until age 70. At that point, Bill would receive $2,640, Betty would switch over to her $1,000 spousal benefit (half of Bill’s primary insurance amount), and they’d bring in a total of $3,640 per month.
The restricted application isn’t as useful for single income households, of course, but for many dual income couples, it allows for the same or even greater lifetime SSI compared to File and Suspend.
Origin and End
How did these strategies come about in the first place? “Decades ago, when most households had a primary wage earner, the spousal benefit was designed for the spouse who stayed at home, raised the kids and had no personal Social Security record,” says John Daly of Daly Investments.
The ability to file and suspend, on the other hand, didn’t come about until 2000 with the Senior Citizens’ Freedom to Work Act. “It allowed for voluntary suspension for people who’d already claimed Social Security benefits,” says Ben Westerman, Senior Vice President of HM Capital Management. “They realized they shouldn’t have started collecting, and they needed to work more.”
The combination of File and Suspend and spousal benefits is what created the popular strategy we saw until 2015. Rather than returning to work, couples used the strategy to collect at FRA, stay retired and earn delayed retirement credits.
In attempts to rein in spending and reduce deficits, Congress set April 30, 2016 as the last day anyone could file and suspend for the purpose of triggering a spousal benefit. “The government assessed the costs of these loopholes and used the savings to get the budget through Congress,” says Westerman. “The Social Security administration claimed the loopholes, including File and Suspend, were costing them around $10 million per year.”
Alternatives for Couples
Fortunately for soon-to-be retirees, the restricted application hasn’t been phased out yet. For anyone who turned 62 by January 1, 2016, the strategy is available in the same form as before. For widows and widowers, the new rules have no effects on survivor benefits, either. A higher earning widowed person can still collect survivor benefits while their own benefit matures.
For younger pre-retirees, however, the “deemed filing” rule has changed. No matter what age they file, they are deemed to be filing for the higher amount, be it their spousal benefit or their own. Without the ability to suspend, clients are essentially “stuck” with their decisions.
“Still, spousal income is something lots of people aren’t aware of, and it can be a lifeline for people who haven’t earned as much as their spouse,” says Daly. What many clients don’t realize, as well, is that spousal benefits even apply to divorcees, so long as they were married for at least 10 years and haven’t remarried since. Lower-earning divorcees don’t even need to wait for their exes to start collecting, as long as they’ve been divorced for at least two years.
“Beyond that, though, the main strategy is to delay your benefit, especially for the higher earning spouse” says Westerman. “Even if you blow your other assets, you still have this larger benefit to fall back on.”
Delaying Benefits More Important than Ever
Once the restricted application has phased out, there will be no more strategies for bolstering a couple’s combined SSI, and delaying benefits will be even more important than it is today. Those who wait until 70 can receive up to a 32 percent boost in inflation-adjusted benefits, while those who collect early are left with a 25 percent lifetime reduction. Those rates of return are hard to beat, especially considering Social Security’s automatic inflation adjustment.
“Generally speaking, it’s better to bleed down your other assets and delay Social Security as long as possible,” says Westerman. “That’s a tough sell for people because they’d rather not use their own assets.” If clients understand their increasingly limited options, however, they may think twice before making an emotionally motivated decision to collect early.