You probably don’t know it, but the government may have just picked your pocket with regard to future Social Security benefits. The Bipartisan Budget Act of 2015, signed into law by President Obama on November 2, will greatly reduce the effectiveness of two little-known strategies to maximize Social Security benefits—namely, suspension of benefits and restricted applications. Proper usage of these techniques could add well over $60,000 in benefits for many two-earner couples during the first few years following retirement.
To “file and suspend” a benefit means that the worker files for his Social Security benefit as if he is going to start receiving payments, but then immediately “suspends” it—in other words, he will not actually receive payments until reinstated. The purpose of the suspension is generally to enable his wife (or husband—it works both ways) to collect spousal benefits, while allowing the worker’s benefit amount to increase due to later retirement.
In two-earner families, at full retirement age a wife is entitled to the greater of her own benefit or half of her husband’s entitlement. A “restricted application” occurs when the wife applies for spousal benefits only, while declining to apply for her own earned benefit. This is done, often in conjunction with the husband suspending his benefit, in order to receive spousal benefits while allowing her own benefit to increase for later retirement.
To illustrate how these strategies are used, assume that Abe and Sarah are both age 66, and retire under Social Security with annual benefits of $30,000 each. Assuming that Abe lives until age 84 and Sarah until age 88, their approximate life expectancies, and that inflation is 3 percent per year, they will receive a total of $1,672,000 in lifetime benefits. Alternatively, Abe can “file and suspend” his benefit at age 66, and wait until age 70 to commence receiving his payments, which will be 32 percent larger at that point (there is an 8 percent increase for each year that benefits are deferred between ages 66 and 70). Sarah can file a “restricted application” for spousal benefits only, receive half of Abe’s entitlement, or $15,000 per year, until age 70. At age 70, Sarah will then file for her own benefit, which is also 32 percent higher at that time. In this manner, by deferring benefits until age 70 and using both the “file and suspend” and “restricted application” techniques, Abe and Sarah will receive total lifetime payments of $1,940,000, or $268,000 more than they would get had they both simply commenced their own benefits at age 66.
Now, thanks to the budget bill, which was negotiated and put together hastily with no public debate and no public hearings, these techniques are being eliminated. Spousal benefits will no longer be payable on any retirement benefits that are suspended more than 180 days after passage of this bill. Restricted applications will no longer be permitted for anyone who is younger than age 62 on December 31, 2015.
Suspension of benefits is only allowed if you are between ages 66 and 70. Therefore, if you are not in this age range, you are probably best off just ignoring this issue. The government robs us blind through waste and corruption virtually every day, so there is no need to fret over this latest outrage, especially if you never even knew that you could eventually benefit from it. BUT, if you are between ages 65-1/2 and 69 today, then you need to quickly evaluate whether suspending your benefits is worthwhile, because you must do it before May 2016 in order to be grandfathered in the old, more beneficial rules. Also, if you are over age 62 by the end of 2015, you are grandfathered in the old restricted application rules, and should consider whether you can use them to your advantage.
Social Security rules are very complicated, especially for couples, divorcees, widows and disabled people. Our government gives and takes away, sometimes in a seemingly arbitrary and capricious manner. Make sure that you get everything you are entitled to, and act fast if you are in a position to suspend your benefit and gain from the old rules.
Michael Karlin is a Fellow of the Society of Actuaries, with over 35 years of experience as a pension consultant to large organizations. He now assists individuals in maximizing their pension and social security lifetime payouts, and is also available to speak on the subject. You can visit Mr. Karlin’s website ssmaximize.com, or reach him by phone at 201-836-6408 or 201-741-7774, or by email at [email protected].
By Michael Karlin
