In late October I received an email with the scary subject line, "Congress Is Killing The File-And-Suspend And Restricted Application Social Security Strategies."
There had been rumors that Congress would soon be closing loopholes in Social Security, and those rumors became reality on Nov. 2, when President Obama signed the Bipartisan Budget Act of 2015 into law, eliminating the important file-and-suspend and restricted-application provisions. For years, these provisions allowed many retirees to collect thousands in extra benefits -- but future Social Security recipients will miss out on this too-good-to-be-true opportunity.
What retirees are losing
The previous guidelines allowed a person who was at full retirement age or older to file for Social Security benefits and then immediately suspend them. The spirit of this act was to allow retirees who received Social Security benefits to put their payments on hold if they decided to go back to work. However, this became a loophole that allowed anyone at full retirement age to file and suspend in order to earn delayed-retirement credits, even as their spouses collected a spousal benefit. In case you're unfamiliar with delayed-retirement credits, for every year past your full retirement age that you suspend your benefits, your eventual payment increases by 8%. So, if an insured person has a full retirement age of 66 and suspends until 70, their benefit will be 32% higher.
As an example, let's say John and Jane have both worked outside the home and earned enough to qualify for their own Social Security benefits, and they both have a full retirement age of 66. If John files and suspends, Jane can collect a spousal benefit of up to 50% of John's primary insurance amount. Meanwhile, John's benefits will grow by 8% per year for as long as he defers them (up until age 70, beyond which he would receive no further delayed-retirement credits). While Jane collects spousal benefits, she can also defer her own benefits until age 70, at which point she can switch to her own benefit, which would be her PIA plus another 32% (8% per year for four years).
Assuming John's PIA were $2,000 and Jane's spousal benefit were half of that ($1,000), with this loophole now closed, this change would cost John and Jane an estimated $12,000 per year for the four years that Jane would have collected had she been able to collect the spousal benefit. That's a total of $48,000 in lost benefits.
The other group that will feel the sting of this change is folks who planned to collect benefits from ex-spouses. The old law allowed a divorced individual to claim a spousal benefit on an ex-spouse's earnings while still delaying his or her own benefit.
What this means to you is that while the core benefits of Social Security have not changed, it might be time to revisit your retirement income strategy. If the file-and-suspend strategy was part of it, then you may have to come up with a plan B to offset the loss of benefits. If you happen to turn 62 by the end of 2015 or are already there, then you may be able to take advantage of the "grandfather" provisions for those years prior to age 70 -- but don't delay, as you only have until May 1, 2016, to act.