We analyze Social Security for many of our clients. In presenting their options, we have often pointed out a strategy that maximizes expected lifetime benefits. However, we have been careful to caution clients not to rely on this approach in financial plans due to concerns that came to fruition this week.
On November 2, Congress passed legislation that closed loopholes it unwittingly opened back in 2000. The main target was a Social Security strategy that earned many couples tens of thousands of dollars more than Congress had intended. We often saw couples who could receive over $70,000 in additional benefits. The Center for Retirement Research estimated that the strategy cost the government $9.5 billion annually.
Under the old rules, couples could have their cake (immediate income) and eat it too (maximize expected lifetime earnings). There were two tools that made this strategy work (a) file-and-suspend and (b) a restricted application. Let's imagine a couple where the husband's social security earnings are larger than the wife's.
File-and-suspend sidestepped the rule making spousal benefits unavailable until the husband files for his own benefits. File-and-suspend allowed the husband to file (enabling the wife to receive spousal benefits, which are one half of the husband's full retirement age benefits) and immediately suspend and delay his benefits (enabling them to grow at 8% per year).
A restricted application meant that the wife could elect to take spousal benefits in lieu of her own benefits. Because she would not access her own benefit, it would grow by 8% per year. At age 70, when the 8% increase stops, she could switch to her own, inflated benefit.
The end result was both spouses taking benefits at 70 that were about 1/3 more than they would have received at their full retirement ages of 66. That was as intended: the government compensates you for taking fewer years of benefits. However, Congress had not intended that the wife would also receive spousal benefits for four years, from age 66 to age 70.
Once the new rules are in effect, there will be no more file-and-suspend. When someone suspends benefits, he will suspend benefits for everyone receiving them on his earnings record, meaning no spousal benefits while the husband delays.
There will also no longer be a restricted application that once allowed you to select your benefits source i.e. take spousal benefits instead of your own. Filing for benefits will result in receiving whichever benefit - spousal or your own - is larger.
Anyone who has already elected these strategies will not be affected. The new rules also grandfather in people who initiate these strategies soon. There is a great chart (below) on Michael Kitces's blog illustrating who is eligible to use either or both of these tools moving forward.
For example, a husband and wife who are 63 will not be able to file-and-suspend. However, one of them will be able to file a restricted application for spousal benefits at full retirement age. The inability to file-and-suspend means that one spouse must start receiving his/her own benefits at 66 because spousal benefits are only available if the other person has filed.
Our analysis on the rule changes is ongoing. The file-and-suspend plus restricted application strategy wasn't apparent to most until years after the rules were in place, so it may take time to figure out the new landscape. We will be reaching out to clients that we believe would gain from being proactive in the near term. If you have any questions, please do not hesitate to contact us.