Budget Bill Kills ‘File and Suspend’ Strategy to Maximize Social Security

Social Security's Windfall Elimination ProvisionWhen it comes to Social Security, most of us hope to get the most we possibly can from our benefits.

Methods for making that happen, however, are a source of heated controversy. “File and suspend” is one advanced claiming strategy that has helped retirement savers at all income levels, especially women, maximize their benefits. But under the new budget deal passed by the Senate on Friday, it will no longer be an option beginning in early 2016.

That could mean as much as $50,000 less in lifetime Social Security benefits for some recipients, according to an article by Laurence Kotlikoff, a professor of economics at Boston University and staunch proponent of “file and suspend.”

What is ‘file and suspend’?

Under the “file and suspend” strategy, one spouse files for Social Security benefits and then immediately suspends those benefits. By doing so, this spouse preserves his or her ability to receive delayed-retirement credits while also letting the other spouse claim a spousal benefit.

How does this work? Let’s walk through an example.

Tom and Beverly were some of my first Social Security consulting clients. They were both 66 years old and ready to retire. Tom’s full-retirement-age benefit was $2,200 and Beverly’s was $900.

As we discussed their options, I mentioned to Tom that he could get delayed-retirement credits of 8% per year until age 70. He was captivated. All he had to do was wait four years to draw benefits and his would increase by at least $704 per month.

Once Tom filed for Social Security, Beverly was entitled to a spousal benefit of $1,100 per month, considerably more than the $900 available under her own work record. But for her to receive that extra $200, Tom would have to file first.

Enter the “file and suspend” strategy. With it, Tom could earn the delayed-retirement credits and allow Beverly to file for the full spousal benefit.

Under fire

It might sound simple, but not everyone thinks seniors should have access to “file and suspend.”

In a MarketWatch article titled “Let’s Close Down Social Security Gaming,” Alicia Munnell, director of the Center for Retirement Research at Boston College, argued that advanced claiming strategies — including “file and suspend” — were loopholes that should be shut down.

The Obama administration has also described some of these filing strategies as “manipulative” and “aggressive,” arguing that high-income seniors use them to gain an unfair advantage.

But “file and suspend” does have its advocates, including many financial advisors and Kotlikoff, who believe that eliminating the strategy would cause more Americans to take benefits too early, lowering their Social Security payouts for life.

‘File and suspend’ for the middle class

The wealthy aren’t the only ones who can use “file and suspend.” It can come in handy for middle class folks, too. Most workers don’t have a pension, and many are finding out that their retirement accounts don’t provide the income stream they’d hoped for.

That’s especially true for women. According to the Social Security Administration, single women over 65 depend on Social Security for over half of their income. Men in the same group only depend on Social Security for a little over a third of their income.

For those who rely on Social Security, using strategies such as “file and suspend” can mean the difference between having safe housing and reliable transportation and having to go without.

Increasing your current and survivor Social Security benefits should be top considerations when you make your claiming decisions.  Those who are eligible now can take advantage of the strategy for a few more months. Minus the “file and suspend” option, be sure you carefully consider alternative ways to maximize your benefits.

This article was also published on Nerdwallet, NASDAQ & Christian Science Monitor