New Congressional Budget Deal Could Impact Your Social Security Benefits

On November 2, 2015, President Barack Obama signed a federal budget deal that eliminated two important Social Security strategies. These strategies, mostly applicable to married couples but also ex-spouses, had allowed for upwards of $50,000 in total lifetime benefits that wouldn’t otherwise have been received.

File and Suspend

The first strategy, known as file and suspend, came about when Congress passed the Senior Citizens’ Freedom to Work Act in 2000. Under the act, a person could file for Social Security benefits, subsequently suspend collecting these benefits, and continue to receive delayed retirement credits until age 70.

In the case of a married couple, one spouse could choose to file and suspend, allowing the other spouse to file a restricted application for spousal benefits at full retirement age while also allowing his or her own benefit to grow until age 70. In other words, both spouses were able to delay their own benefit after they’ve started receiving a source of income from Social Security. Figuring in the most recent full retirement age deemed by the Social Security Administration (66) and the 8 percent annual growth of delayed Social Security benefits, this strategy allowed couples to effectively increase their individual benefits by 32 percent.

However, as of the signing of this bill on Monday, individuals will have six months to file and suspend if they’re going to be 66 within this time frame; otherwise, they’ll need to reevaluate their Social Security strategy with their advisor to determine the next best option. The good news for individuals already using the file-and-suspend strategy to max out their household Social Security benefits is that the law grandfathers them in and won’t affect the benefits they’re receiving. In addition, voluntary suspension of benefits will still be an option for those who decide, after taking their benefits, that they want to go back to work or don’t need the benefit until later. Doing so allows the benefit to grow until age 70, at which time the individual will receive the higher benefit.

It’s important to note that, under the new law, those who opt to suspend their benefits will also be suspending all other Social Security payments derived from their earnings record, including spousal benefits, dependent benefits, and even ex-spouse benefits.

Restricted Applications for Spousal Benefits

The second strategy the law eliminates is filing a restricted application for spousal benefits only. Before, a spouse could file a restricted application for a spousal benefit if he or she had reached full retirement age, allowing his or her own benefit to grow until age 70. However, under this new law, a person who files for a spousal benefit will be considered to have filed for his or her own benefit as well, eliminating the ability to allow that benefit to grow. Similarly, a divorced person who files on an ex-spouse’s record also will be deemed to have filed for his or her own benefit. These new rules on restricted applications will apply to anyone who hasn’t turned 62 by the end of 2015.

When One Door Closes

While these strategies provided greater overall lifetime benefits in the past, there’s still ample opportunity examine your options for receiving Social Security benefits with your advisor and choose the best strategy for you. For those who will turn 66 within the next six months, it’s important to discuss with your advisor to review whether it’s in your best interest to take advantage of the file-and-suspend strategy before it’s phased out.

For more information on the new law and insight on how it may apply to your personal situation, contact your Moss Adams professional.