Eight questions about Social Security claiming strategies

The bipartisan budget deal signed into law last last month by President Obama jolted some near-retirement couples–and the retirement-planning world–by closing a loophole in Social Security law that a growing number of married couples were using to substantially increase their benefits.

The law makes changes in two Social Security claiming maneuvers–“file-and-suspend” and “restricted claims”–that have become the foundation of online-optimization services offered by financial-services firms and companies offering Social Security advice.

In the long run, closing the loopholes will simplify the range of Social Security claiming choices available to couples. But for now, the clampdown has created as many questions as it answers–about the closed loopholes, but also about the Social Security claiming techniques that remain available to married couples in the wake of the new legislation.

Herewith are answers to the key questions I’m hearing from readers.

Q: What’s all the commotion about, anyway?

A: Good question, since both of these maneuvers were obscure and not very well known to the public until the past few years. Roughly 100,000 workers and spouses have used the strategies, according to Social Security Administration (SSA) estimates. The techniques exploit a loophole created when the Senior Citizens Freedom to Work Act of 2000 became law.

The law had its origins in Newt Gingrich’s Contract With America, which proposed repealing rules discouraging seniors from working. The Freedom to Work Act repealed the retirement-earnings test for workers who had reached full retirement age (FRA). Today, the earnings test reduces annual benefits–only for those below FRA–by $1 for every full $2 the beneficiary earns over the annual exempt amount (currently $15,720), although the withheld benefits are later returned.

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The main intent of the law was to give people incentives to work longer by allowing them to work and receive full Social Security benefits after they reached FRA. Several years after its passage, some clever financial advisors noticed that the language opened the door for the file-and-suspend and restricted-claim maneuvers.

When used together, restricted applications and file-and-suspend are used to boost a couple’s lifetime Social Security benefits by allowing them to accumulate delayed retirement credits while also collecting a benefit.

Q: What’s a delayed retirement credit?

A: Social Security benefits are calculated using a formula called the primary insurance amount, or PIA. Although you can claim benefits as young as 62, by waiting until your full retirement age (currently 66), you’ll receive 100% of PIA; every 12 months that you delay beyond that point–until age 70–tacks on an additional 8%. Conversely, if you wanted to file for benefits at 62–the first age of eligibility–your PIA would be reduced by 25%, and that reduction would continue for the rest of your life. (For more on how your Social Security benefit is calculated, read this Q&A with the program’s chief actuary, Stephen C. Goss.)

Q: How did the benefit-boosting loophole work?

A: The first maneuver is called file-and-suspend. The spouse with a higher benefit–typically the husband–files for his benefits at full retirement age and then suspends them, continuing to accrue delayed retirement credits. That set the stage for the lower-benefit spouse to file for her own benefit, but “restricting” the application to a spousal benefit only. The restricted application effectively delays the filing for her own benefit, allowing it also to continue earning delayed retirement credits.

Q: How much in additional benefits could married couples get using these claiming techniques?

A: That all depends on the couples’ PIA, but it can typically range from $35,000 to a little more than $60,000 in today’s dollars, according to Michael Kitces of Maryland-based Pinnacle Advisory Group and author of the Nerd’s Eye View Blog.

Q: What exactly is changing under the clampdown?

A: The budget act prohibits new file-and-suspend claiming, starting six months after the legislation’s enactment (President Obama signed the law on Nov. 2). And it disallows restricted applications for anyone who has not reached age 62 by the end of calendar-year 2015.

Q: It sounds like some people will still be able to squeeze in on this before the door shuts?

A: Yes. Since file-and-suspend is only available to workers who have reached full retirement age, it remains available to workers who either already have turned 66, or will do so within the next six months – the deadline is April 29th, according to the Social Security Administration. Couples who already have executed the strategy are unaffected by the new law.

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  1. It’s crazy that married couples could get such a higher amount in benefits by using these claiming techniques. I’m glad to see that couples who have already executed the “file and suspend” technique are unaffected by newer laws because I’m fairly certain that’s what my in-laws did. Thanks for explaining it all, and making sure it’s all in simple terms so that I can have a better understanding!

  2. Thanks so much for this post. Social Security can be such a complicated quagmire of loopholes, it’s great to read a post that’s relatively straightforward on explaining these. I think everyone over a certain age wonders about the complexity of the Social Security system. Great to get a few answers to take back to my wife and my financial people. Thanks again.

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