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Congress Overhauls Social Security Spousal Benefits
Published Date : November 4, 2015
When Congress and President Obama struck a budget deal last week, political and market observers alike cheered as years of partisan gridlock seemingly came to an end, if only briefly. Those who probably aren’t cheering as much? The many Baby Boomers nearing retirement who saw the Social Security system turned on its ear with the curtailment of a widely utilized and lucrative benefits strategy known as “file and suspend.” Using this wealth maximizing tactic, married couples with at least one spouse at full retirement age have been able to both grow their future annual Social Security benefits while simultaneously drawing additional benefits, in the form of spousal benefits, in the present. In 2009, the Center for Retirement Research estimated that this “file and suspend” strategy, if pursued by all eligible couples, would cost $9.5 billion per year and significantly more in future years; thus it would become a prime target for a Congress wanting to eliminate potentially onerous unintended loopholes in the Social Security system. While dramatic changes are afoot, it’s important to note that Congress will grandfather those currently employing “file and suspend” while also leaving open a six-month window for those wishing to take advantage of it for the first time.
To understand how Congress arrived at this point requires a bit of history. Prior to the recent battles over debt ceilings and government shutdowns, Congress passed legislation in 2000 allowing those who had reached full retirement age (as determined by year of birth) to file for Social Security, and then voluntarily suspend payments for themselves, allowing their annual benefits to grow at 8% a year. Subsequently, the spouse would file for spousal benefits and immediately receive 50% of the suspended payment amount. This was part of a law designed to encourage more seniors to work, since taking Social Security while working normally results in a discounted benefit.
To illustrate “file and suspend” in action:
A two income couple both hit their full retirement age of 66 in 2015: the husband in March, the wife in June. The husband applies for his retirement benefits on his 66th birthday and then immediately suspends his Social Security, so his benefit can continue to grow 8% a year to his age 70. At 66, the wife applies to take spousal benefits only: she receives 50% of her husband’s entitlement, and allows her own earned benefit to grow until she is 70.
According to the Social Security Administration, the maximum benefit for a high earner retiring at 66 in 2015 is $2,663, or $31,956 per year. For an individual with full Social Security entitlement, a spouse can collect half of that amount —$1,331.50 a month, or $15,978 per year—based on the earning history of the other, while allowing his or her own benefits to grow. At 70, the spouse can collect his or her own larger benefits and the spousal benefits end. Depending on the earnings history and ages of the spouses when this strategy is implemented, combining primary and spousal benefits could mean tens of thousands of dollars per year of Social Security income. And benefits are automatically adjusted each year to keep up with inflation.
Under the new law, no one can receive benefits on the earnings record of a spouse whose benefits are suspended. This recent budget deal does not, however, mark a definitive end to “file and suspend.” In addition to the grandfather clause for those couples currently implementing this strategy or capable of doing so in the next six months, an allowance has also been made for those individuals who want to correct their Social Security filing of benefits. If a retiree goes back to work or wishes to change his or her Social Security strategy, Social Security payments that have already started can be suspended and be eligible to accumulate 8% annual delayed credits to age 70.
The Bureau of Labor Statistics estimates that 78 million Baby Boomers will file for retirement benefits over the next 20 years – an average of 10,000 baby boomers retiring each day. Against the backdrop of Congressional fiscal battles, it is likely that further changes to Social Security loom. Social Security strategy is already complicated and the new law requires careful analysis of each unique circumstance. With these recent policy changes in mind, anyone nearing retirement or wishing to reaffirm their previous elections should consult their Wealth Manager for a thoughtful analysis and financial planning assessment. The next six months will be a vital period for Social Security planning.
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