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Among its many provisions, the budget deal moving quickly through Congress puts an end to “file-and-suspend,” a lucrative strategy for couples that can boost lifetime Social Security retirement benefits by hundreds of thousands of dollars.
File-and-suspend was a little-known strategy until a few years ago, but it has been quickly gaining popularity because it permits married couples to have their cake and eat it too.
The strategy calls for the higher-earning spouse to file for Social Security benefits at his or her full retirement age, but then suspend that filing while the benefit grows, until as late as 70. The lower-earning spouse can then claim spousal benefits at his or her own full retirement age, and later shift to their own full benefit, if it is larger. (A spousal benefit is half of the primary earner’s benefit.)
The Center for Retirement Research has estimated that file-and-suspend adds $9.5 billion in annual benefit costs to the program.
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The White House targeted it for elimination in the budget plan issued last year, calling it an “aggressive” move used by high-income households to “manipulate” benefits. The budget deal approved by the House this week would clamp down on the practice for anyone who turns age 62 after calendar year 2015.
File-and-suspend has been at the top of the list for reform over the past year – and it was thrown into this deal as part of the political horse trading that yielded the crucial agreement to beef up Social Security’s disability insurance trust fund.
That fund is on track to run out of money next year, which would have produced an immediate 19% cut in disability benefits; that problem has now been pushed down the road to 2022.
The budget deal reallocates funds from Social Security’s retirement trust fund – a move pressed for by disability advocates and the White House but resisted by Republicans.
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The original bill language also implied that benefits would be ended for spouses who already were receiving benefits under a spouse’s suspended filing.
That would have been a damaging, unwise move since it would have pulled the rug out from people relying on benefits – and it would have been an administrative nightmare for the Social Security Administration.
Congressional sources say that was never the intent, and that the language in the bill is being revised to clarify that only new file-and-suspends are disallowed, beginning 180 days after the bill is signed into law. That opens a window for six more months for people to file and suspend, if they choose that strategy.
More routine spousal strategies will remain in place, and couples should study them carefully. It still makes sense for higher-earning spouses to delay their filing, and some lower-earning spouses may want to file for the 50% spousal benefit ahead of their own full retirement ages, if that benefit is greater than their own full benefit.
It is also possible to boost Social Security benefits through delayed filing by continuing to work or by drawing down retirement nest eggs to fund living expenses in the early years of retirement while allowing eventual Social Security benefits to grow.
Still, the rapid-fire nature of the budget deal shows the need for a more serious, long-range debate about Social Security.
“There hasn’t been a discussion since the Bowles-Simpson commission (about five years ago) about serious, fundamental Social Security reform,” says Jason Fichtner, senior research fellow at the Mercatus Center at George Mason University, and a former deputy commissioner of the Social Security Administration. “Frankly, reform should be done holistically, but instead this got done as part of a negotiation over the disability insurance problem.”