Social Security rule changes are set to go into effect later this year, eliminating a strategy used by some couples to increase their lifetime payments. The changes are not, technically, a reduction in benefits. Lawmakers are simply removing an unintended loophole. The good news is the changes are a step toward improved financial stability for Social Security, helping ensure the program’s future.
Before we get into the details, please note couples already using the strategy are “grandfathered” and are permitted to continue doing so. In addition, certain couples can still begin using the strategy before the new rules kick in on May 1. Here is what you need to know:
It pays to wait
Individuals are first eligible for Social Security retirement benefits at age 62. For each year a person waits to begin collecting, however, payments increase approximately eight percent. These increases are known as deferral credits and may be accumulated up until age 70.
Waiting until age 70 to begin collecting benefits results in the highest possible payment. Obviously, the downside is foregoing the extra income during those initial years. Under current rules, however, certain couples can earn deferral credits for waiting even as one spouse receives Social Security benefits.
Getting paid while you wait
How do you get credit for waiting without actually waiting? Let’s use an example: First, “Sally” files and immediately suspends her application for Social Security benefits. Then, her husband “Joe” files a restricted application for spousal benefits.
To file and suspend, or file a restricted application for spousal benefits, one must already have reached full retirement age (between 65 and 67 depending on date of birth). Otherwise, the individual’s own personal benefit will not earn deferral credits.
The two filings do not need to occur at the same time. For example, Sally could file and suspend at her full retirement age in anticipation of Joe, who is younger, reaching full retirement age years later and filing a restricted application for spousal benefits then.
In our example, Joe’s spousal benefit is based on Sally’s work record rather than his own. The amount is equal to half of the benefit Sally would be eligible to receive, had she not suspended. Under current rules Joe is permitted to collect a spousal benefit beginning at full retirement age, while his own benefit continues to increase. Then, he can switch to his own personal benefit later.
Closing the loophole
“File and suspend” and “restricted application” are the two rules which have been targeted in recent legislation. Going forward, Sally will still be allowed to suspend her Social Security benefit. Doing so, however, will suspend any spousal benefits available to Joe, as well.
Restricted applications will go away altogether. In the future, a rule called “deemed filing” will apply when Joe applies for benefits. The rule dictates Joe is only eligible to receive the larger of the spousal or his own benefit. It will no longer be possible for him to collect a smaller spousal payment, and then switch to his own larger benefit once he’s maximized his deferral credits.
The new rules do not go into effect until May 1. Anyone who reaches full retirement age by April 30 can still file and suspend before the deadline. Furthermore, anyone who reached age 62 in 2015 is still eligible to file a restricted application when they reach their full retirement age in the future. Vista will be contacting clients who meet these conditions and can still benefit from this strategy.
Editor’s Note: This article was originally penned by our late colleague, Gordie Gorsuch, whose timeless wisdom lives on in Vista’s investment philosophy.