Social Security after file-and-suspend: Brave new world began this week

The Social Security file-ocalypse came and went, and the system is still standing. Benefits are being paid and workers still are  claiming their benefits.

The big event? The closing of a legal loophole last month that permitted married couples to game the system of spousal retirement benefits through joint claiming strategies. So-called “file and suspend” and “restricted claims” were worth around $35,000 to $60,000 in extra lifetime benefits.

You would have been forgiven for thinking the world was coming to an end. Enraged near-retirees and media commentators attacked Congress, President Barack Obama, and (probably) the ghost of Franklin D. Roosevelt.

But the loophole never made any sense. Created inadvertently with passage of the Senior Citizens Freedom to Work Act in 2000, it allowed one spouse to file for benefits and then suspend payments, while the other claimed a spousal benefit. Both then waited to file for their own benefit, earning valuable delayed credits.

Couples still hoping to take advantage of the file-and-suspend maneuver (and who qualified by dint of being born prior to January 1954) needed to start the process by the end of April. What is left for married couples aiming to maximize their benefits, now that file-and-suspend has faded into the sunset?

As it turns out – plenty.

Married couples should always consider Social Security as a coordinated exercise aimed at maximizing their lifetime household benefits, and they should consider a range of options. Should one or the other spouse start benefits early, should both delay or should both file early?

Most often, couples will benefit if the higher-benefit spouse delays filing to earn delayed credits. Social Security’s filing rules are designed to be actuarially “fair,” which means the credits for delayed filing (and penalties for early filing) should give us all roughly the same lifetime income – at least, according to the actuarial tables. You receive about 8 percent less for every year you file early (starting at age 62), and the same increase for every year you wait until age 70 – the last year for which additional credits are available.

Higher-income people tend to live longer, so they stand to benefit from delayed filing.

“It pays to run the numbers illustrating one spouse starting benefits as early as possible while the other person waits as long as possible – usually the higher-earner,” said Jim Blankenship, a financial planner based in New Berlin, Illinois, and author of “A Social Security Owner’s Manual.”

Learn more in my Reuters Money column this week.

And, if you need help running your own numbers, consider these options:

Financial Engines, the big advisory firm for 401(k) plans, offers a free online tool.

The Social Security Administration has a free downloadable tool.

Social Security Solutions offers a solid online solution for a small fee.

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