Budget deal will end Social Security file-and-suspend strategy

The budget deal moving quickly through Congress would put a stop to a lucrative strategy that can boost lifetime Social Security retirement benefits by hundreds of thousands of dollars.

File-and-suspend is a variation on the more straightforward strategy of delayed filing to earn a higher monthly benefit down the road. It permits married couples to have their cake and eat it too—they can earn credits for delayed filing and bring in some Social Security income while they wait.

File-and-suspend was a little-known strategy until a few years ago, but it has been gaining popularity fast. The Center for Retirement Research has estimated that file-and-suspend adds $9.5 billion in annual benefit costs to the program. The White House targeted it for elimination in the budget plan issued last year, and calling it an “aggressive” move used by high-income households to “manipulate” benefits. It’s been on the hit list for many retirement policy experts for some time now.
File and suspend guide - adThe budget deal approved by the House this week would clamp down on the practice for anyone who turns age 62 after calendar year 2015.

The budget law will curtail new file-and-suspends next year. Although the original bill language implied that benefits would be ended for spouses who already were receiving benefits under a spouse’s suspended filing. That would have been a damaging, unwise move since it would have pulled the rug out from people relying on benefits – and it would have been an administrative nightmare for the Social Security Administration. Congressional sources say that was never the intent, and that the language in the bill is being revised to clarify that only new file-and-suspends are disallowed, beginning 180 days after the bill is signed into law. (That means anyone still contemplating a file-and-suspend is looking at a six-month window to get the ball rolling.)

File-and-suspend was the price of getting a deal done to extend the solvency of Social Security’s disability insurance trust fund. The fund had been on course to run out of money late in 2016, which would have precipitated a disastrous 19 percent cut in benefits. The budget deal averts that cut by reallocating funds from the retirement trust fund – the right move and a big win for disability advocates. However, since Republicans insisted that any reallocation be accompanied by offsets elsewhere, the file-and-suspend reform was thrown in the mix. The long-range saving projected by Social Security’s actuaries were sufficient to satisfy that requirement.

“We fully support the Social Security provisions of this agreement,” said Christina Martin Firvida, AARP’s Director of Financial Security and Consumer Affairs. “This bill ensures that 11 million disabled workers and their families continue to receive all of their Social Security benefits for the next 7 years without cutting any benefits for anyone receiving retirement benefits today.

“The claiming strategies impacted would apply entirely to future beneficiaries who have at least some time to adjust their claiming strategy. Anyone who is today benefiting from the claiming strategies impacted in this legislation would be able to continue to receive enhanced benefits.”

Strong arguments have been made for preserving file-and-suspend and for killing it. To be honest, I can see both sides of the debate. It’s unfortunate that this change was slipped into the budget deal with no serious public debate about its merits. Just one more example of the legislative and policy process at work in Washington these days – you really don’t want to see the sausage getting made.

Learn more at Reuters Money.

Comments

  1. anthony bryan says:

    Hi Mark,
    I read your article in Reuters and it contained some errors in regards to filing for spousal benefits. You wrote, “The lower-earning spouse can then claim spousal benefits at his or her own full retirement age, and later shift to their own full benefit, if it is larger. (A spousal benefit is half of the primary earner’s benefit.) ” This is not correct. A spousal benefit is half (if the spouse applies at their FRA) of the primary earner’s PIA (Primary Insurance Amount), not their benefit.
    Also, you wrote, “It still makes sense for higher-earning spouses to delay their filing, and some lower-earning spouses may want to file for the 50 percent spousal benefit ahead of their own full retirement ages, if that benefit is greater than their own full benefit. (For more on how much couples can reap in additional benefits, see reut.rs/1ePEqXg)” . A spouse who files for spousal benefits before their own FRA cannot get half of the primary earner’s PIA (again, not the primary earner’s benefit), as if they file before their own FRA their spousal benefit will be actuarially reduced permanently.

  2. I’m surprised that there was not more debate among retirees before the bill passed.

  3. Wildbluyawnder1 says:

    I’m curious, what happens to a person if they were going to file at 66 for their divorced spouses benefit and wait until 70 to switch to their own. They were married for 11 years and he left to leave her destitute. Both spouses are the same age of 63 as of 2015. Can this still be done? He has earned more than she has by far…

  4. Mark Miller says:

    Good question, wildblulawnder1. Answer: the Social Security rules around divorce are distinct and separate from all the recent changes. Here’s an article I wrote about how those rules work. http://www.reuters.com/article/2013/05/09/us-column-miller-socialsecurity-divorce-idUSBRE94810120130509

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