This article was updated on May 12, 2016.
Social Security has already been under attack in many Americans' eyes, with retirees seeing their monthly benefit checks stuck at the same level in 2016 that they received in 2015. Now, in a change that could affect the financial future of millions of Americans, the government took away a key strategy that many have used for years to get more from Social Security. As a result, many will miss out on tens of thousands of dollars in Social Security benefits.
In last fall's showdown over the federal budget, Congress and the President agreed to a deal that avoided a government shutdown. To get the deal done, though, both sides agreed to close what some perceived as loopholes in the Social Security system. One such provision involves what's known as the file and suspend strategy, and with the effective date of that part of the legislation having taken effect at the beginning of May, those who didn't act fast lost this strategy forever -- and millions more will never have had a chance to use it at all. Let's take a look at the file and suspend strategy and what the recent changes mean for those who haven't yet taken advantage of it.
What file and suspend meant for Social Security recipients
The file and suspend strategy was designed to help retired couples take advantage of two different rules to maximize their benefits. In order to trigger a spouse's right to claim spousal benefits, a worker must file for Social Security benefits. Yet if someone suspends their benefits beyond full retirement age, they can earn delayed-retirement credits that will boost their eventual monthly payout.
Therefore the strategy worked was relatively simple. The primary worker would file for Social Security at full retirement age but would immediately suspend them. The spouse would then file for spousal benefits, which were allowed, since the primary worker had filed. Later, the primary worker would have the suspension removed and start collecting benefits, with a higher monthly amount based on how long the worker had kept the benefits suspended.
The result of the file-and-suspend strategy is that couples could get one payment from spousal benefits while still allowing the primary worker's future benefit to grow. By waiting from age 66 to age 70, a worker can get 32% higher monthly checks, and the boost has a positive impact on the amount of survivors benefits the spouse will get after the worker's death as well. Without the ability to get that spousal benefit to supplement their other income, many couples wouldn't have been able to delay taking the worker's primary benefit until a later age, missing out on higher benefits for the rest of their lives. The alternative would be to give up on spousal benefits potentially for years, costing tens of thousands of dollars in lost Social Security payments.
What the government did
The law that passed the new budget deal includes provisions that effectively eliminated the benefits of the file and suspend strategy. Specifically, what the law says is that if the primary worker suspends Social Security benefits, then a spouse or children who are getting benefits based on that worker's earnings history can no longer receive Social Security payments. In other words, the decision to suspend the worker's benefits also suspends all other benefits related to that worker.
The effective date of the law was 180 days after the Nov. 2 passage of the bill, or May 1. Those who suspended their benefits before that May 1 effective date were grandfathered in, and family members were still be eligible to get spousal or other benefits if the primary worker's benefits remain suspended after that date. That means that the file and suspend strategy will still work if the primary worker filed and suspended before then. The only ones who could do so were those who turned 66 before the May 1 date, leaving younger Americans with no recourse.
If you were too young to file and suspend before the May 1 deadline, your only recourse is to try to get lawmakers to change their minds and reinstate the strategy. Given the effort to which lawmakers went to get the budget deal done, a reversal seems unlikely. Yet for those who had planned on having the additional benefits that the file and suspend strategy offered, that might be the only recourse to help them stick with their financial plan for retirement.
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