Tens of millions of people rely on Social Security benefits in retirement, and most of them see any attack on those benefits as a threat to their financial security. Late last year, lawmakers decided that a couple of valuable Social Security strategies represented costly loopholes that gave an unfair advantage to certain participants in the program. Yet for those who were counting on those strategies, the fact that they're no longer available has required a big shift in their retirement planning. In particular, the key Social Security strategy known as file and suspend is no longer available as of May, and its disappearance will force many to reconsider their options for claiming Social Security benefits.
What the file-and-suspend strategy allowed
Married couples were able to use the file-and-suspend strategy as a way to activate benefits for family members while still allowing their own retirement benefits to grow. Under the strategy, one spouse would file for Social Security benefits at full retirement age. But instead of actually receiving benefit checks, that spouse would immediately suspend the benefits.
At first, that sounds like a silly thing to do. After all, if you don't want your Social Security benefits, it'd be easier just not to file in the first place. However, filing for your own retirement benefits is a necessary condition for your spouse to receive spousal benefits based on your work history. Under previous law, suspending your retirement benefits didn't stop your spouse from continuing to get spousal benefit checks from Social Security. A couple could therefore get some Social Security money now, but the person who filed and suspended benefits would continue to earn delayed retirement credits. That in turn would boost the eventual monthly benefit payment after that person chose to lift the benefit suspension at a later date.
To give you a sense of how valuable file and suspend was, take a simple example. Say that two spouses are both 66, and only one worked during their lifetime. The working spouse's retirement monthly benefit at full retirement age would be $1,000. Using the strategy, the working spouse could file-and-suspend benefits, allowing the non-working spouse to claim a spousal benefit of half the working spouse's benefit amount, or $500 per month. Meanwhile, rather than receiving $1,000 per month, the working spouse's suspension of benefits would allow the monthly amount to grow. If the working spouse waited until age 70 to collect benefits, then the monthly payment would rise to $1,320.
The new file-and-suspend rules
Under the new law, however, the file-and-suspend strategy is no longer available. Specifically, if someone chooses to suspend benefits, then any family members entitled to spousal or other family benefits based on that person's work history will also have those benefits suspended.
Those who were eligible to file and suspend and who acted quickly after the passage of the law had six months in which they could implement the strategy. But as of the beginning of May, those grandfathering provisions expired, and file and suspend will no longer be available for anyone who didn't put it into motion before that date.
How to handle Social Security without the file-and-suspend strategy
Because of the changes, families have to reconsider their decisions about taking benefits. The removal of the strategy takes away a key incentive to make people wait to file for benefits until full retirement age. In some cases, filing early in order to activate spousal benefits sooner will be the smarter move under the new rules, leading to a larger total family benefit over the long run.
However, you also need to keep in mind that most couples' financial situations are more complicated. For instance, it's rare for a spouse to have absolutely no work history whatsoever, and the fact that both spouses might be able to claim retirement benefits of their own lessens the negative impact of not having file and suspend available any longer. Using the above example, if the non-working spouse had actually worked in the past and was entitled to a $500 retirement benefit, then there would be no need to have the working spouse file to activate a spousal benefit in exactly the same amount. As a result, the family can achieve the same result by having the non-working spouse file for retirement benefits but having the working spouse wait until a later date.
The loss of the file-and-suspend strategy had a big impact on many couples preparing for retirement. However, going forward, it's important to take the current rules and use them to your best advantage. If you know what you're doing, then you can still make the most of the benefits you're entitled to receive from Social Security.