How file-and-suspend ended: Here’s the back story

When President Obama signed the Bipartisan Budget Act into law this week, he changed Social Security’s retirement benefits with a stroke of his pen. The law makes changes in two Social Security claiming maneuvers – “file and suspend” and “restricted claims” – that have become the foundation of a loophole strategy that married couples could use to optimize benefits.

It’s striking that these changes – we’ll refer to them together as F&S for shorthand in this post – will take effect so quickly. Changes to Social Security usually are phased in slowly over many years, but the window on file-and-suspend effectively closes on April 29th (more on the details of how that works below).

Closing the F&S loophole is sparking an uproar in the financial planning world, mainly because some married clients near retirement age who hoped to execute an F&S will need to re-think their plans. Couples who already have executed an F&S are grandfathered.
File and suspend guide - adThe timing of the F&S change is a little surprising, but closing this loophole has been at the top of the retirement policy hit list since the White House proposed the change in its 2015 budget. My sources say the idea came from the Social Security Administration (SSA), which was becoming alarmed by the growing cottage industry of firms hawking F&S optimization. I wrote in October that F&S wasn’t long for this world.

You’ll hear some critics of Social Security argue that this change shows you just can’t trust the government, that you can’t rely on Social Security, or that there’s something fundamentally unfair about ending F&S. A good example is Larry Kotlikoff, who is part of the optimization industry despite his hostility to Social Security (freeze the current system and replace it with personal saving accounts. In this blog post for the PBS NewsHour, he writes:

The bill not only cuts benefits for people who are about to make their Social Security collecting decisions . . . [but is] an absolutely terrible precedent for Congress (and the administration, which is fully on board) to make. No retiree will ever again be able to feel their Social Security benefits are safe from some backroom, midnight, rushed change in rules that are designed to meet some budget target or accommodate some politician’s whims.

Ok, here’s why the closing of the F&S window makes sense – and why it doesn’t really signal a broader shift in the way Social Security reforms are made.

The budget act closes a loophole that is costing the Social Security Trust Fund $9.5 billion annually that it can ill afford. The loophole was created without Congressional intent with the passage of the Senior Citizens Freedom to Work Act of 2000. That 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 $13,560), although the withheld benefits are later returned. The main point 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.

Some years after the Freedom to Work Act was passed, clever financial advisers noticed a provision in section 4(b) of the law, which reads:

(b) CONFORMING AMENDMENT TO PROVISIONS FOR DETERMINING AMOUNT OF INCREASE ON ACCOUNT OF DELAYED RETIREMENT- Section 202(w)(2)(B)(ii) of the Social Security Act (42 U.S.C. 402(w)(2)(B)(ii)) is amended by striking ‘or suffered deductions under section 203(b) or 203(c) in amounts equal to the amount of such benefit’ and inserting ‘or, if so entitled [emphasis added], did not receive benefits pursuant to a request by such individual that benefits not be paid’.

The intent of Congress here was limited, argues Nancy Altman, president of the Social Security Works coalition, an attorney and a historian of the Social Security program. “I believe the goal of that provision was simply to allow someone who started receiving benefits at FRA, now without reduction as a result of other earnings, to suspend receipt in order to receive the delayed retirement credits.”

But here’s where the gaming came in. “The language says that the worker is entitled to the benefits, irrespective of whether you are working at full retirement age. That’s the language on which the file and suspend maneuver hinges, because it is interpreted to mean that if you file and suspend you are entitled to the benefit, even if you’re not receiving it.”

Executing the strategy actually involves a two-step process.

The first maneuver is called file-and-suspend. The spouse with a higher benefit – typically the husband – files for his or her benefit at full retirement age and then suspends it – continuing to accrue delayed retirement credits. That sets the stage for the lower-benefit spouse to file for her spousal benefit (equal to 50 percent of the husband’s). If her full benefit is greater than the spousal benefit, she had the additional option – under the loophole – to “restrict” 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.

The budget act prohibits new file-and-suspend claiming, starting six months after the legislation’s enactment. And it disallows restricted applications for anyone who has not reached age 62 by the end of calendar 2015.

Some workers will still be able to squeeze in on this before the door shuts. 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. (Couples who already have executed the strategy are unaffected by the new law).

Also, there likely will be a “long tail” of this type of filing stretching through 2019. The restricted application is available only for people who have turned 62 by the end of calendar year 2015. That means an end to the practice of filing for a spousal benefit at your full retirement age and shifting to a (larger) individual benefit later on.

Notably, the clampdown doesn’t mean married couples can’t can’t gain any advantages by coordinating their Social Security strategies.

They still can benefit by considering a range of options- should one or the other spouse start benefits early, should both delay, or both file early? Most often, couples will benefit if the higher-benefit spouse delays filing to earn delayed credits. For more on that, consult my free Guide to Social Security Spousal Strategies.

A final note: if you have used (or plan to use) any of the Social Security optimization services now available, be aware that many of these have been taken offline for updating. Don’t use any of these services until they can certify that they are good to go with the new rules.


  1. I am glad to hear of this change although in all honesty, I planned to use it. It was obviously a way to game the system and it helped create a cottage industry in Social Security advisors, which we don’t need. Removing it also makes the program more fair as many people would not be able to take advantage of these sorts of angles anyway.

  2. seneca griggs says:

    My wife and I were fortunate enough to begin “file and suspend” a year ago. On the one hand, being a conservative, I’m all about the government spending less. But when you consider the Gov is in debt to the tune of 20 trillion or so, 9 billion a year isn’t even chump change.

  3. As a single person this strategy always seemed unfair “penalty” for singles versus married SS recipients. I’m glad the loophole is closed.

Speak Your Mind