As of April 30, 2016, Congress has closed some lucrative Social Security loopholes through the Bipartisan Budget Act of 2015. Specifically, the ability to apply for either a spousal benefit or your own retirement benefit has gone away, and the popular file-and-suspend strategy is a thing of the past as well. Here are the details of the recent changes, and what they could mean for your retirement plan.
Social Security spousal benefits: The 1-minute version
Social Security spousal benefits are intended to provide retirement income to spouses who didn't work, or who earned a disproportionately low amount of money in their careers, compared to their husbands or wives. For example, if one member of a couple was a stay-at-home parent for most of their marriage, spousal benefits are in place to guarantee them a minimum stream of retirement income.
Simply put, spousal benefits guarantee that your Social Security benefit at full retirement age will be no less than half of your spouse's. Your benefit based on your own work record will be calculated first, and if it's less than one-half of your spouse's full retirement benefit, a spousal benefit will be given to make up the difference.
Spousal benefits are subject to most of the same rules as regular Social Security retirement benefits, such as a reduction for filing before full retirement age. For a thorough discussion of spousal benefits, check out this other article.
Deemed filing: What you need to know
Before the new laws went into effect, married individuals could choose to file for spousal benefits only, and allow their own retirement benefits to continue to grow.
For example, if each spouse in a married couple would be entitled to a $1,500 monthly benefit at age 66, one spouse could file for their own retirement benefit and the second spouse could claim the spousal benefit only. Meanwhile the second spouse's benefit would continue to grow, thanks to delayed retirement credits.
Now, if a spouse applies for one type of benefit, he or she will be deemed to have applied for both (hence the name "deemed filing"), and will receive the higher of the two. Spouses can no longer delay their own retirement and collect a spousal benefit at the same time.
It's important to mention that if you turned 62 before January 2, 2016, you are grandfathered in. In other words, if you were already 62 or older as of New Years' Day in 2016, you can choose to file for spousal benefits and not your own retirement benefit.
No more file-and-suspend
The "file-and-suspend" Social Security strategy allowed workers to file for their own retirement benefits, then immediately suspend those payments in order to let them go back to growing. Meanwhile, their spouse could collect a spousal benefit on the primary earner's work record, since they had technically filed for retirement benefits -- one of the main spousal benefit requirements.
Then, the suspended benefits would be reinstated at age 70 (or sooner) at a higher rate. In a nutshell, this loophole allowed couples to delay their retirement and receive some benefits from Social Security simultaneously.
Under the newly implemented law, this is no longer the case. Social Security recipients can still choose to voluntarily suspend their benefits at full retirement age in order to obtain higher benefits later. However, by doing so, any other benefits payable on their work record, including spousal benefits, will also be suspended.
Additionally, during the time when their own benefits are suspended, individuals cannot receive spousal benefits on another person's work record. There is an exception for divorced spouses, who can still receive divorced spousal benefits on an ex-spouse's work record, even if their benefits are voluntarily suspended.
Unlike the deemed filing strategy, nobody is grandfathered into file-and-suspend eligibility. The last day for individuals of full retirement age to apply for a voluntary suspension and take advantage of the file-and-suspend strategy was April 30, 2016.
Are there any good Social Security strategies left?
Deemed filing and the elimination of the file-and-suspend strategy will definitely crimp the plans of many couples who are approaching retirement age. However, there may be other ways to maximize your benefits.
One suggestion -- if both spouses worked, and each is entitled to substantial benefits based on their own income history -- is to have the lower-earning spouse file for benefits at or before full retirement age, in order to get some Social Security income sooner. Meanwhile, the higher-earner waits to file for benefits while accumulating delayed retirement credits. The idea is that the increase for delaying retirement (currently 8% per year past full retirement age) will be much more advantageous for the second spouse. Here's a more thorough discussion of this strategy with some examples, if you're interested.
The bottom line is that while the lucrative spousal benefit loopholes have been closed, you still have plenty of options when it comes to filing for your and your spouse's Social Security benefits.