Some married and divorced couples may face retirement feeling a little less secure in light of some pending changes to Social Security. Congress is fiddling with eliminating two strategies that have been employed for decades that will have a significant effect on couples at or nearing retirement age.
File and Suspend
File and Suspend is a strategy that allowed a married retiree to file for benefits at his or her full retirement age, immediately suspend them, then begin collecting when the benefits reached their highest value at age 70. This allowed the other spouse to collect a spousal benefit. In a single-income household, this was particularly beneficial. The breadwinner could file and suspend, which enabled the stay-at-home spouse to collect spousal benefits while the earner’s social security check continued to grow.
What happens when the proposed changes go into effect? Whichever spouse wants to pursue the file and suspend strategy must be 66 before next May. The spouse that wants to employ the strategy must file and suspend before April 30, 2016. In addition, the individual collecting spousal benefits must be at least 62 to do so, though in order to receive the full spousal benefit, the beneficiary must be 66. If they are not 66, the amount will be reduced and they will be considered to be taking early retirement benefits.
For those now under 62, the new bill extends Deeming, which currently ends at full retirement age (age 66), through age 70. No matter how you look at it, the new requirements are going to have you on the losing end of the stick.
With the new proposal, Deeming requires a) that if you take your retirement benefit and are eligible to collect your spousal benefit, you are forced to take both at once and, b) if you take your spousal benefit, you are forced to simultaneously take your retirement benefit. Since Social Security only pays the larger of the two benefits, being forced to take both benefits at once means that you lose one of the two benefits.
Under the current law, you can wait until full retirement age, take just your spousal benefit if you are eligible for it and then let your own retirement benefit grow. Being eligible requires having your spouse file for his or her retirement benefit. But if your spouse is at full retirement age or over, he or she can employ the File and Suspend strategy mentioned above
In order to file a restricted application for spousal benefits only, individuals must be 62 or older by Jan. 1, 2016 or be born Jan. 1, 1954, or earlier. Those retirees are grandfathered in; they can collect those benefits once they reach their full retirement age, even if that is several years from now. Those retirees who turn 62 after Jan. 1, 2016 are no longer eligible to participate in Deeming.
These changes are going to have devastating effects on the lives of millions of retirees. Be sure to discuss any imminent social security changes that may impact your retirement income with your financial advisor.