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The Last Chance to Take Advantage of “File and Suspend” is Fast Approaching!

Have you ever been on a road trip and noticed a sign on the highway proclaiming something like “Last Gas for 90 Miles”?  That probably prompted you to check your gas gauge and you may have even decided to err on the side of caution, pulling into the filling station to top off your tank.  How would you have felt, though, if, instead, the sign had said, “Last Gas . . . forever . . .”? 

For many Americans a similar sign has been posted on the Social Security highway proclaiming the approaching end of a popular strategy known as “File and Suspend”.  Since 2000, when Congress passed the Senior Citizens Freedom to Work Act creating the concept of “voluntary suspension” of Social Security benefits, many thousands of Americans have taken advantage of this strategy.

So, what is File and Suspend, what changed, why should you care, and what, if anything, can you do about it?

To understand the File and Suspend strategy first requires a brief primer on how Social Security benefits are calculated and paid. 

There are three important ages to be concerned with when it comes to claiming Social Security benefits; age 62, age 70, and something known as Full Retirement Age (FRA).  Why didn’t I mention the age of FRA? Because FRA is a different age for different people. 

Most of us grew up under a system where age 65 was FRA for drawing Social Security benefits.  In fact, when Social security began paying benefits in 1940, the average male life expectancy was only 60.8 years, while the female life expectancy was 65.2 years.  You can see how, at that time, a program that didn’t start paying benefits until 65 was assured of remaining solvent!

Over the years, however, as life expectancies increased, the payout of benefits eventually increased at a higher rate than the dollars coming into the system through payroll deductions.  In fact, by 1983, when Congress passed the Social Security Amendments of 1983, the life expectancy had increased to 71.0 for men and 78.1 for women.  What modern medicine was doing for the long-term health of the population, was wreaking havoc on the very program that was expected to pay benefits to that population through their lifetime.  By the time the law began to take effect in 2000, men had life expectancies of 74.3 years and women had life expectancies of 79.7 years!  A far cry from 1940!

What did the Social Security Amendments of 1983 do?  The Act began the process of shifting the FRA from age 65 to age 67.  The shift began to occur in 2000 and will be completed by 2022.  To understand how that shift is taking place, see the following table:

Now that we understand FRA, it’s time to examine the importance of the other ages mentioned above; 62 and 70.

For the purposes of this discussion, it is important to understand that one is eligible to begin receiving 100% of their calculated Social Security benefit if they wait until their FRA to begin receiving their distributions.  That does not mean that one may not begin to receive benefits until that date, only that, to receive their full benefit, they must wait until then.

In fact, one can begin receiving Social Security benefits as early as age 62 and can delay receiving them as late as age 70.  What would be the point of taking benefits early or late, and what would the financial impact be?

If one begins taking benefits at age 62, they will receive a reduced benefit for a longer period of time than if they wait until FRA.  How much of a discount?  It depends.  As of the date of this article, an individual born in 1953 or 1954 has reached age 62.  FRA for such individuals, under the table above, is age 66.  In that case, a person who retires and begins taking benefits at 62, whose full retirement age is 66, will see their benefits reduced by 25%. 

If, on the other hand, that same individual waits to take benefits beyond FRA, they will see their annual benefit increase by 8% per year until age 70, at which point their benefit is capped at 132% of what they would have received at FRA. 

So, when should one begin taking benefits?

The decision as to when to begin taking benefits is something of a gamble.  Certainly, the decision would be made much easier if one knew exactly how long they were going to live!  But, since we don’t have that luxury, we must all take our best guess and make our decision.  The choices are –

• Start at age 62 and take a discounted benefit for a longer time,
• Start at FRA and take a higher benefit for a shorter time, or
• Start at 70 and take a much higher benefit for a much shorter time?

According to the Social Security Administration, all three choices are actuarially equal to one another meaning that you will see the same overall economic effect no matter which you choose.  Since the Social Security Administration’s statement is based on the averages of many millions of people, we must consider how the choice of starting early or waiting may benefit or hurt an individual whose future path will almost certainly deviate from the averages.

There have been many studies that have attempted to determine what the break-even points are for individuals who begin taking benefits at age 62, as well as at age 70, vs. taking them at FRA.  The inherent problems with any such break-even analysis is the myriad variables that must be considered, including investment rates of return, tax brackets, inflation rates, and one’s health, to name a few. 

In one such study, a person claiming early benefits in March 2011 and one not claiming until age 66 in March 2015 would have the same amounts of money 16 years and eight months after the 66-year-old's benefits began. That amounts to age 82 and eight months for both claimants; before this age, the 62-year-old claimant comes out "ahead" by filing early. At older ages, the person who waits until full retirement age to claim would come out ahead.  This is an average. Depending on taxes, inflation, and investment returns, the range of break-even ages goes from 81 to 86 1/2. There is a similar range of break-even ages in the comparison of benefits begun at age 66 to age 70—from the age of 84 to nearly 87.[1]

Nonetheless, since the introduction of the “File and Suspend” strategy, many people have decided to see if they could buck the odds and beat the system, with many doing so successfully.  So, that brings us back to the question, “So, what is File and Suspend, what changed, why should you care, and what, if anything, can you do about it?”

Under the soon-to-expire voluntary suspension rules, an individual who reached FRA could file a claim for their benefits, but, then, immediately suspend the payment of those benefits until they later chose to re-start those payments.  The strategy typically permitted an individual to allow their benefits to continue to increase at the 8% rate per year mentioned above until, at age 70, that individual began receiving payments at 132% of what they would have received if they had started receiving their benefits at FRA.

However, what really made the strategy an effective retirement planning tool was coupling “File and Suspend” with a spousal claim for restricted benefits. With the restricted application for just spousal benefits, the (presumably) younger and lower-earning spouse would file a claim for benefits on his or her spouse’s account, at some point after that spouse has filed and suspended their own benefits.  As you may be aware, one spouse can generally receive half of the other spouse’s Social Security benefit in lieu of claiming their own benefit.  When – and if – the spouse that claimed on the other spouse’s account finds that their benefit on their own account is greater than the spousal benefit, then they can switch their benefit to a claim on their own account, thus receiving a higher payment.

So, now that you know about this rather slick strategy, what’s changing?  Pretty much everything. 

Under last fall’s budget legislation, Congress chose to close what they saw as “loopholes” in the Social Security system, effective the end of this April.  Once that date passes, it will no longer be possible to file the type of restricted application for just spousal benefits as described above.  In addition, if one chooses to suspend their benefits after the end of April,  that suspension will apply to all other individuals receiving benefits on that account, such as spouses and dependents.  After that date, anyone who suspends will find that no benefits will be payable to anyone who has claimed on that account until the individual who suspended chooses to reinstate benefits.

What can one still do now?  For a limited time, there is a fairly limited population who can still take advantage of either “File and Suspend” or a restricted application.  Following are the rules for filing and suspending as reported on the Social Security Administration’s website, https://socialsecurity.gov/planners/retire/suspend.html:

Note: Effective April 30, 2016:

• We will no longer permit suspension of retroactive benefits in situations where you apply for benefits and we have not yet made a determination regarding your entitlement.
• If you voluntarily suspend your retirement benefit and you have others who receive benefits on your record, they will not be able to receive benefits for the same period that your benefits are suspended. Please note that there is one exception; divorced spouse’s will be able to continue receiving benefits.
• If you voluntarily suspend your retirement benefit, any benefits you receive on someone else’s record will also be suspended.   Your Part B premiums cannot be deducted from your suspended benefits.
• If you request voluntary suspension on or after April 30, 2016, we will only permit benefit reinstatement beginning with the month after the month of your request.

In addition, it is important to be aware of the rules for claiming social security benefits on just the account of a spouse.  For any individual who had not reached age 62 by January 1. 2016, the window is closed.  They are now subject to what is called a Deemed Filing.  This is called “deemed filing” because when you apply for just the spousal benefit you are “deemed” to have also applied for your own benefit.

For any individual who had turned at least 62 on or before January 1, 2016, the deemed filing rules do not apply to you, but you still have to be aware of the new File and Suspend rules as discussed above.

These new rules are extremely confusing, so, to try to simplify them, see the following:

For more information about Social Security benefits, visit the Social Security Administration web page on claiming strategies (https://socialsecurity.gov/planners/retire/claiming.html) 

Do you have a question about file and suspend, retirement planning or other financial concerns? I am ready to start the conversation. Contact us at info@zinnerco.com or any of the professionals on staff at 216.831.0733 for a no-cost, no-obligation consultation. 

[1] Philip Moeller, “What's Your Social Security Break-Even Age?” U.S. News Money, accessed March 1, 2016, http://money.usnews.com/money/blogs/the-best-life/2013/02/13/whats-your-social-security-break-even-age.