File and suspend. Under this strategy, a higher earner at full retirement age can claim his benefit, enabling his lower-earning spouse to claim a spousal benefit (generally half of the higher earner's benefit). He then immediately suspends his benefit so that he can earn 8% a year in delayed retirement credits until he reapplies up until age 70. In the meantime, his lower-earning spouse collects monthly spousal benefits.
Under the new law, the lower-earning spouse will no longer be able to claim a spousal benefit if the higher earner suspends his benefit. People who are getting benefits now under the strategy will continue to receive their money after the May 1 deadline.
The new law also will eliminate a beneficiary's ability to collect years of retroactive benefits. Under the current law, a person who suspends benefits is allowed to undo that decision later and claim a lump sum of retroactive benefits stretching back to the day the beneficiary filed his application. Say you filed and suspended at 66 to earn delayed credits, but become ill at 69. You could collect three years' worth of benefits retroactively, but you would forgo delayed retirement credits. Anyone who files and suspends by the end of the six-month grace period will be eligible to collect retroactive benefits, says Marc Kiner, co-founder, with Blair, of Premier Social Security Consulting.
Restricting an application. Under the current law, if a beneficiary applies for benefits between 62 and full retirement age, the Social Security Administration "deems" that the beneficiary must take the highest benefit he's eligible for -- whether it's a retirement benefit or a spousal benefit. Once a beneficiary reaches full retirement age, however, he can choose to restrict an application to spousal benefits only. That means a higher earner can collect the spousal benefit while allowing his own benefit to accrue delayed credits.
The new law will end this option by extending the deeming rule to applicants of all ages. When someone applies for a benefit at any age, the Social Security Administration will automatically give the beneficiary the highest benefit. So a higher earner who applies at full retirement age will no longer be able to collect a spousal benefit if his own retirement benefit is higher. He'll have a choice: either collect his retirement benefit, or delay. Anyone age 62 or older at the end of 2015 will be allowed, at full retirement age, to restrict an application to spousal benefits only.
Couples where at least one spouse gets in under the wire may still have opportunities to maximize income. Say both Mary and John are 64. His full retirement benefit at 66 is $2,000 a month and hers is $500. They will still be eligible to use the restricted application strategy in two years. At that point, Mary can take her $500 benefit, and John can file a restricted application for a spousal benefit of $250 a month while continuing to earn delayed credits. Without the new law, they would have qualified for the file-and-suspend strategy: John would have been able to file and suspend, and Mary would have collected $1,000 a month.
For years, many couples have engaged in both strategies at once. They may still be able to do so. However, they will need to employ some fancy maneuvering while keeping their eyes on the calendar -- especially if they differ in age. Couples should run the numbers before deciding if either strategy works for them.
Say Jim is 66 and the higher earner, while his wife, Betty, is 64. Before the new law passed, their plan was for Jim to file and suspend in two years. Betty would have taken a spousal benefit at her full retirement age while he accrued delayed credits until age 70.
Under the new law, Betty will still be eligible, in two years, to file a restricted application. But the only way she can restrict her application to a spousal benefit is if Jim files for his own retirement benefit. How can that happen if Jim intends to delay claiming until 70?
He needs to file and suspend -- before the six-month deadline ends, says William Reichenstein, a professor of finance at Baylor University, in Waco, Tex., and a principal of consulting firm Social Security Solutions. By doing so, the wife can restrict her application to a spousal benefit when she turns 66 -- while the husband delays. Otherwise, Reichenstein says, "she'd have to wait" to claim her spousal benefit when he claims his own benefit, perhaps when he is 70.
Married couples are not the only ones hit by the new law once all the changes are fully in place. Singles will no longer be able to use the file-and-suspend strategy to preserve their ability to collect a large lump sum retroactively. Beneficiaries will not be able to file and suspend to trigger dependent benefits for a child while delaying their own benefits. And divorced people will no longer be able to use the restricted application strategy to take spousal benefits while letting their own benefits grow. However, someone who is divorced for more than two years will still be able to claim a spousal benefit even if the ex-spouse files and suspends, or delays, his benefit, says Blair.
Another casualty: a lower-earning spouse who claimed her own benefit early but planned to switch to a higher spousal benefit at full retirement age, says Blair. Under the new law, when her spouse applies for his benefit, the lower earner will be switched to the spousal benefit immediately if that benefit is higher than her own. That will affect her income: The earlier a spousal benefit is claimed before full retirement age, the smaller the benefit will be.
The survivor benefit will remain unscathed. A survivor is eligible for 100% of the late spouse's benefit. A survivor will be able to, as she can now, claim a survivor benefit first while letting her own benefit grow until 70. Or she can take her own benefit early, and later claim a survivor benefit at full retirement age.
While two key strategies are disappearing, beneficiaries can still earn delayed retirement credits up to age 70. And a beneficiary will continue to be allowed to suspend his or her own retirement benefit at full retirement age or later. Suspending can still help a beneficiary who claims a reduced benefit early, but later wishes he hadn't and wants to earn delayed retirement credits to boost his benefit.
See Also: Which States Tax Social Security Retirement Benefits?
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