The congressional budget deal that was passed last night will have a dramatic impact on several social security strategies. If you have been using, or considering using, the file and suspend clause to increase your social security payments, think again.
Back in February of this year, I wrote a column on “How to make the most out of Social Security.” I explained that you could improve your total social security benefits, as well as your spouse’s, by almost 13% by the time you both reach the age of 70. It’s called “file and suspend” and occurs when the Social Security claimant files for benefits and then suspends receiving them, while collecting benefits for a spouse.
The ability to file and suspend was granted under the Senior Citizens’ Freedom to Work Act of 2000. Although at first the strategy for married couples was an obscure oddity, overtime, especially in the past couple of years, it has become almost main stream with a growing number of financial planners and accountants recommending the strategy to their clients.
The impetus to change these “unintended loopholes” came about in President Obama’s budget proposal for fiscal year 2015. The administration argued that these loopholes were simply “aggressive Social Security claiming strategies which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.” Senate Majority Leader Mitch McConnell, a Republican from Kentucky, said closing the loopholes would result in $168 billion in long-term savings.
It is hard to dispute these allegations, although a study by the Center for Retirement Research at Boston College found that only 46% of the benefits flowed to the top 40% of wealthy households. A couple aged 66 years old that used the file and suspend strategy would potentially be able to make more than $200,000 combined in extra benefits over their lifetime. With that kind of return, not only the wealthy but anyone who could was jumping on the bandwagon.
There are other changes as well in the legislation. It appears that anyone who turns 62 next year or later would lose the right to collect just spousal benefits, for example. Another provision of the legislation would place a surcharge on higher-income recipients of Medicare.
What has surprised most professionals about the legislation was the speed in which these provisions will be implemented. Normally, changes such as these would give taxpayers plenty of time to adjust. Many who were already claiming these benefits would expected to be grandfathered and only new claimants would be impacted.
Preliminary indications are that in this case the changes would be enacted immediately and no one will be grandfathered but the situation is still fluid. The House passed the legislation 222-167 and now the bill moves to the Senate. Since November 3 is the deadline on the debt ceiling, (when the government’s borrowing authority runs out) this budget must be passed no later than next week.
There is still time for some backroom horse-trading in which retirees would be given more time, say six more months or so, before the changes went into effect. Clearly, if you are using one of these claiming strategies, a call to your financial planner or accountant is in order sometime soon to see what the fall out will be once the budget is passed.