Congress Closes Social Security Benefit "Loophole"

Question:  My wife and I are both 61 years old. We earn above-average incomes and our projected Social Security benefits at full retirement age are $2,600 each. Our financial planner told us we should wait until age 70 to take advantage of a 32 percent increase of annual benefits between the full retirement age and age 70. She also told us that if I would file for Social Security at my full retirement age and then suspend payments, when my payments start at age 70 they would include the 32 percent increase and my wife could start collecting a spousal benefit equal to one-half of my benefit when she turns 66. Then when she turns 70 she could switch to her own benefit, which would include the 32 percent increase.

Now I hear that Congress is passing a law that might cancel this strategy. What’s that all about?

Answer: The “file and suspend” strategy has been a useful tool in a retiree’s retirement tool kit since 2000. As you stated, if you wait until age 70 to collect, your payments will be 32 percent higher than they would have been at age 66. And if one spouse implements that strategy, the other spouse can collect spousal benefits between 66 and 70 that are equal to 50 percent of the other spouse’s benefits.

In 2000, Congress passed the Senior Citizen Freedom to Work Act, and that law allowed people to suspend their benefits in order to build delayed credits if they continued to work past full retirement age. Under the 2000 law, a spouse could start spousal benefits four years earlier than he or she could have before.

Now fast forward to 2015. Congress, looking for ways to extend the debt ceiling, needed to cut spending. As “file and suspend” with spousal benefits became more widely known and more people took advantage of it, Congress started thinking of it as a “loophole” and they put an end to it by adding a provision to the “Bipartisan Budget act of 2015” that passed both Houses last week and the President signed on Monday. The bill extends the debt ceiling until March 2017.

Question: Does this mean I have to start taking Social Security at full retirement age?

Answer: Full retirement age is 66 for people born in 1943-1954 and gradually increases to age 67 for people born in 1960. The new bill does not prevent you from increasing monthly benefits by suspending them until you reach age 70. It only prevents your spouse from receiving spousal benefits while you are suspending your benefits.

This change can have a substantial effect on your retirement plan. Using you as an example, if your expected monthly payments at age 66 are $2,600 each and if you were able to file and suspend and your spouse was able to begin collecting spousal benefits, she could collect $62,400 in benefits from age 66 to 70 ($1,300 x 48 months). Under the change to the law, she can’t do this. She can start her own benefits at age 66 or she can wait till 70, but she can’t claim spousal benefits while your payments are suspended.

Question: When does this change take effect?

Answer: The change becomes effective May 1, 2016.

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to ken@montereypw.com.