Social Security 'file and suspend' rules changed: what you need to know

The recent Congressional budget resolution that eliminated two popular claiming strategies used to maximize Social Security benefits means that many couples might need to rethink their retirement timing or adjust their standard of living. If you are at or near retirement age, it’s important to understand the changes and how they might affect you.

The two strategies, known as “file-and-suspend” and “restricted application,” have grown in popularity in recent years because they allow married couples to maximize their benefits based on the earnings of their spouse. The changes are complicated, and how they affect you will depend on your and your spouse’s age and earnings status, among other factors, so I recommend you work with a qualified financial planner to determine their impact.

Let’s use an example of a married couple, Brian and Susan, to explain the situation.

File-and-suspend change

In this first example, let’s assume Brian was the higher-earning spouse over their lifetime.

The file-and-suspend claiming strategy has allowed married couples to maximize their Social Security benefits by allowing one spouse (Susan) to claim spousal benefits (50% of Brian’s full retirement age benefit) and the other spouse (Brian) to delay his benefit and earn 8% per year delayed retirement credits by filing and suspending his benefits.

This strategy allowed Susan to start collecting her spousal benefits, even though Brian still had not begun receiving his. Combined with Brian’s eventual benefits being larger due to him earning an extra 8% per year by delaying his benefit, this resulted in thousands of additional dollars of additional Social Security income over the couple’s lifetime.

The new rules state that when Brian suspends benefits he suspends all benefits related to that individual, including spousal benefits. Therefore, Susan can no longer claim spousal Social Security in this example, effectively eliminating this strategy and the loss of potentially years of spousal benefit income, from Brian’s full retirement age of 66 to receiving his maximum benefit at age 70.

Restricted application change

The other big change was the elimination of the restricted application strategy primarily affecting dual-income couples. In this example, assume Brian and Susan both worked and made similar income during their working years. If Susan files for benefits when Brian files and suspends, she will likely receive her own benefit since it is greater than the spousal benefit, effectively losing the 8% per-year growth in retirement benefits. As a way around that, Susan would file for a restricted application instead for only spousal benefits, allowing her own benefits to grow 8% per year until age 70.

At age 70 both Brian and Susan would receive their own benefits, which would be 32% higher than they would have received if either claimed at age 66. That represents a material difference in lifetime income over their retirement years.

This strategy has now been disallowed: The new rule states that when Susan files for benefits, she is deemed to file for spousal and individual benefits. Since she would begin receiving her individual benefits, she would miss out on that 8% per-year growth.

Who do these changes affect?

• If you are already implementing either of these strategies, there is no change; you are grandfathered in.
• People born on or before May 1, 1950, must request benefit suspension by April 29, 2016, if they wish to use file-and-suspend so a spouse can claim spousal benefits.
• People born between May 2, 1950, and Jan. 1, 1954, will remain eligible for restricted application, but not file-and-suspend.
• People born on or after Jan. 2, 1954, will be unable to use either strategy.

Other changes

This post only discusses the changes for married couples, but it also affects divorced spouses, parents with disabled children, and parents in their 60s with dependent children. Work with a professional to understand the effect on your situation.

Next steps

What to do next depends on when you were born. As noted, if you were born after Jan. 2, 1954, unfortunately you have lost out on a lucrative Social Security claiming strategy. Anyone born earlier should evaluate his or her situation to see if anything needs to be done before the April 30, 2016, deadline. Because your decision could result in the loss of thousands of dollars in missed benefits, it is recommended you work with a qualified financial planner to determine the optimal strategy for your situation.

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This article first appeared in NerdWallet.