In the dead of night, while no one was looking, two strategies that have helped retirees take advantage of Social Security spousal benefits have been wiped out.
As part of the budget deal struck last month by House Republicans and President Obama to raise the U.S. debt limit, two key Social Security “loopholes” have been closed: file-and-suspend, and restricted application for spousal benefits.
The ban on file-and-suspend will start with suspension requests submitted 180 days after enactment of the bill. The ban on filing a restricted application applies to anyone who turns 62 this year or later.
The justification for this change was a widely held perception that “wealthy individuals” were “abusing the law and taking unfair advantage of loopholes.”
I can tell you categorically that this, in my experience, was not the case. In my experience, these provisions of the law provided much-needed help in enabling average retirees to delay their benefits, thereby helping them secure their retirement. These options were especially important for divorced and widowed spouses and helped many of our clients stave off poverty.
The burning question for most is this: How will these changes affect your benefits?
File-and-suspend
File-and-suspend is used when the spouse wants to file for the spousal benefit before the worker is ready to claim his or her own benefit.
If Jill wants to start her spousal benefit before Jack is ready to claim his benefit, Jack files for his benefit, thus entitling Jill to her spousal benefit — then he immediately suspends his benefit in order to build 8 percent annual delayed credits.
This strategy was ushered in by the Senior Citizen Freedom to Work Act of 2000. The intent of this law was to allow people to suspend their benefit in order to build delayed credits if they continued to work past full retirement age. An outgrowth of it was the popular file-and-suspend strategy, which allows a spouse to start spousal benefits four years earlier than otherwise would have been allowed.
This “loophole” will close with suspension requests submitted 180 days after the passage of the new budget act. Voluntary suspension will still be allowed. But for people filing and suspending after that date, there can be no spousal benefits — or other dependent benefits — paid off a suspended benefit.
In addition, the lump-sum loophole is being closed. A person can still file and suspend, but when benefits are resumed, they will be paid going forward, with no lump sum and with the benefit amount being figured as of the date of resumption, including delayed credits.
The closing of these loopholes now means that voluntary suspension will be used for its original purpose: to allow a person who has filed for benefits to change his or her mind and suspend benefits in order to build delayed credits. (Note: voluntary suspension still must be done at full retirement age or later.) Going forward, there will really be no reason to file-and-suspend; a person who wants to delay would simply wait until age 70 to file.