Late 2015 saw legislation passed that included the phase out of a lesser known Social Security claiming strategy called “File & Suspend/Restricted Spousal Application.”
Coverage of this piece of the legislation created buzz among retirees, those planning retirement and even younger workers who are concerned about the viability of Social Security for the long-term. As pensions have become less common, Social Security has become the backbone of retirement for many. But because there are a multitude of strategies that vary based on marital status, earnings and disability history, most agree that decisions around benefits can be confusing and any policy changes can raise alarms.
With concern and confusion pretty common, questions we hear include: How should individuals decide on a strategy? Who is affected by the most recent change and which strategy was phased out? Which strategies should those individuals consider now?
When considering your Social Security strategy, it is important to do so as part of your full financial plan. Each individual has a particular set of complexities based on his or her tax situation and spending goals, marital history, health status and intention of working through age 70. The next step is to focus on three key ages: the soonest you can apply for benefits (which varies but is generally age 62), the age you may collect “full” benefits called “Full Retirement Age” (FRA) and the latest you may collect benefits, which is age 70 for everyone.
Because the Social Security Administration no longer mails regular statement, you will need to visit the Social Security website www.ssa.gov to create a login to your personal record and find your “Full Retirement Age.” This is the age any American who has worked long enough at a job where they paid into the Social Security system (40 calendar quarters) may claim a “full” benefit. If you fall into this category and are married or divorced, but previously married for more than 10 years, the recent legislative changes may apply to you.
While everyone should research their options, you will not be affected by the recent changes if you are:
- Divorced but married for less than 10 years
- Turning 62 before the end of 2015
- Currently married or divorced, but previously married for 10 or more years, but have worked fewer than 40 quarters to claim your own benefits
The latter group may claim a spousal benefit, which is half the amount of their spouse’s FRA benefit. If you are widowed, disabled or care for a disabled dependent, contact your local Social Security office to discuss your options.
The strategy in question, “File & Suspend/Restricted Spousal Application,” used by some married couples and divorced individuals who qualified (see below), was also known as “Claim now, Claim more later.” The now “sunsetted” strategy worked like this: If the higher earner was older, they would file for benefits at FRA but immediately suspend them until a later date, thus accumulating an 8% higher benefit for each year they waited to collect. Once their spouse, the lower earner, turned FRA, they filed a restricted spousal application and collected the spousal benefit while allowing their own to also accumulate at 8% a year. Then, at 70, they elect to stop collecting the spousal benefit and instead collect their own maximized benefit. For divorced individuals who never remarried and reached full retirement age, the strategy was even more costly to the Social Security Administration. They could both collect a spousal benefit while allowing their own to be maximized at 70.
In the new budget deal, Congress deemed this to be an unintended loophole in policy that was more beneficial to those with financial means who could afford to suspend benefits until age 70. Thus, it will no longer be available to the following individuals who previously qualified, who were:
- Currently married individuals turning 62 in 2016 or later who have both worked in jobs contributing to Social Security for more than 40 quarters and are eligible to collect on their own benefits
- Divorced individuals who were married for over 10 years and fulfill the same work/age/eligibility requirements as above married individuals turning 62 in 2016 or later
For everyone turning 62 in 2016 or later, when applying for benefits, you will be considered filing for benefits based on your own work history. If your spousal benefit happens to be higher, you may elect the spousal benefit and will continue to collect it until the death of your spouse. At that time, you will have the option to collect your deceased spouse’s benefit (assuming it was higher than your own).
Although File & Suspend/Restricted Spousal Application strategy is no longer available, there are many strategies and combinations of strategies married couples may consider. These include both claiming early at 62 at a reduced benefit, claiming at full retirement age and waiting until a later age up until 70, or any combination of these strategies. And again, if you turn 62 before the end of 2015, you may still elect the File & Suspend/Restricted Spousal Application strategy. If you would like to discuss how these changes may affect your retirement plans or how a financial plan can help you make the best Social Security decision for your family, please contact us at 404-874-6244.
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