2015 Budget Legislation Crushes File and Suspend Social Security Strategy
The Senior Citizens Freedom to Work Act was signed into law in 2000 under President Clinton. It was intended to allow seniors who had previously claimed their Social Security benefits to effectively “pause” them and earn delayed retirement credits until the age of 70. For those claiming their Social Security benefits but not needing them (for example maybe an inheritance came or they went to work part time) this was a great deal!
It was also a great deal for spouses. The law allowed recipients at full retirement age to file for their benefits, then immediately suspend them. This in turn enabled the recipient’s spouse to file a restricted application and activate their spousal benefit at their full retirement age.
When the spouse did this it effectively delayed their own personal Social Security benefits until their maximum claiming age of 70. Delaying their own Social Security benefit allowed them to enjoy the 8% annual bump in lifetime benefit.
A loophole or viable retirement income strategy?
Some considered this a loophole. Others considered this a great way to gain extra income from Social Security benefits which they’d paid into their entire life. The Social Security strategy was legal after all, it’s not like you were breaking the law.
Legal for while anyway. Then along comes the 2015 Budget. Under the new budget it will no longer be possible to file a restricted application just to receive the spousal benefit.
I can spend hours elaborating on the proposal which is likely to pass this week. Simply put it comes down to this: 6 months after the budget passes no individual will be eligible for for benefits based on the earnings record of a person who voluntarily suspends benefits.
If you’re 66 to 70 and receiving spousal benefits while your spouse has their benefits suspended, your checks could stop in 6 months! To prevent this your spouse will need to start their Social Security benefits prior to that 6 months elapsing. I’d recommend waiting until that 6th month to earn the additional delayed retirement credits as long as possible.
This is a massive “financial body slam” to many retirees
The spousal benefits collected through those years (from full retirement age until 70) amounts to as much as $67,000. More importantly t’s early on in retirement when the variability of future outcomes is greatest. Your financial risk grows exponentially since it’s so early in retirement!
It likely wasn’t Congress’ intentions that individuals file for benefits then suspend them to activate the spousal benefits. Congress more likely intended wanted to create an incentive for senior citizens to work a little longer to increase their ultimate Social Security benefit. Instead, the law became a “claim now and claim more later” loophole. Depending on how you look at it it was a goldmine!
Social Security Basics
Social Security is based on your PIA or “Primary Insurance Amount”. This amount is calculated at your FRA or “Full Retirement Age”. That age is typically 66 to 67 years old depending on when you were born.
If you take your Social Security benefits prior to your FRA you get a large reduction in monthly benefits. If you delay your benefits until age 70 you earn an 8% annual increase from your FRA up to age 70.
If you’re reasonably healthy it incredibly wise to wait until age 70 to claim your maximum Social Security benefit. You can’t get a guaranteed 8% return anywhere nowadays, why not take it from the government? You worked, earned, and saved into the system after all.
What now?
Masses of retired investors used this strategy heavily. It made perfect sense after all! It was legal and added tens of thousands of dollars to your bottom line.
The new legislation and budget is crushing. Retirement plans which were once in great shape now face extra scrutiny. You may be forced to make meaningful lifetime adjustments to spending, savings, your retirement date, and more!