Congress and the president finally listened to me. With the budget bill agreement they reached recently, they killed the so-called Social Security maximizing strategies. And I say: Good riddance!
We will finally be getting Social Security back to its intended purpose: a social insurance system designed to provide a basic level of income that senior citizens can count on as a foundation upon which to build their own retirement portfolios. Instead, for the past dozen years or so, it had turned into an investment scheme that mostly more well-to-do seniors were using to reap unintended benefits from the system.
And those strategies came at great cost to taxpayers. It is estimated that the Social Security trust funds were being tapped for about $10 billion extra each year to cover the cost of all these additional loophole benefits.
Let me be more precise about the demise of these maximizing strategies. One of them, called “file and suspend,” will die six months after the bill was signed — in other words, around May 2016. The other, called “file and restrict,” will be on life support for four more years. The budget bill language says that “file and restrict” cannot be used by anyone turning 62 next year or later. But that means that folks who are 62 or older already can still employ the strategy once they turn 66. I will explain all of this in the rest of the column.
This whole mess started in 2000, when Congress passed, and President Clinton signed, the Senior Citizens Freedom to Work Act.
The intention of that law was to allow older people who were still working to claim their benefits at “full retirement age” (meaning age 66 for most folks retiring in the past decade or so). Prior to 2000, working seniors had to wait until age 70 to claim their Social Security benefits.
That same bill introduced the concept of “voluntary suspension” of benefits. The intent of that law was to let seniors suspend their benefits once they reached full retirement age and earn a “delayed retirement bonus” until age 70. That bonus is two-thirds of 1 percent for each month benefits are delayed. So if a person waits until age 70 to actually claim benefits, he or she would get a 32 percent bonus added to his or her retirement check. (By the way, the recently passed budget bill does NOT eliminate this bonus strategy.)
But after awhile, folks analyzing that 2000 law figured out that the voluntary suspension rules would allow someone to suspend their benefits for other reasons.
The primary one became one for working seniors to allow their spouses (and in some cases, even children) to claim benefits while their own benefits were in suspense. This became known as the “file and suspend” strategy.
In a nutshell, the new law says that if the primary wage earner’s Social Security benefits are in suspense, then all other benefits payable on that record must also be in suspense. And this takes Social Security back to its roots. Until the 2000 Freedom to Work Act loopholes opened up, the law had always assumed that if seniors were still working, they were supporting their dependents, and not relying on the taxpayer (via extra Social Security spousal and children’s benefits) to do so.
It also looks like the new law is eliminating the other reason people employed the “file and suspend” strategy. The old rules allowed folks to claim full retroactive benefits if they filed (and suspended) at age 66 and then decided to “unsuspend” before reaching age 70. Those people were allowed to either begin benefits immediately upon the “unsuspension” with the appropriate delayed retirement bonus added to their monthly rate, or to ask for a big retroactive check claiming all benefits payable from age 66 on. The latter option is being eliminated.
In my humble opinion, the bigger boondoggle was the “file and restrict” rules that allowed working spouses to claim “dependent” spousal benefits while letting their own benefits grow with the delayed retirement bonus law. Here is the background.
Social Security law had always said that a claim for one Social Security benefit is a claim for any and all benefits due. In other words, by filing any Social Security claim, you are deemed to have filed all other possible Social Security claims. The gist of that law was this: If you had worked and were due your own Social Security check, you would always be paid that benefit first. Only after those benefits were paid would they look to a spouse’s Social Security record to see if you could get any extra benefits from the spouse’s account.
But stretching the intention of that “voluntary suspension” language in the 2000 Freedom to Work Act law, people figured out that those deemed filing rules ended at full retirement age. In other words, someone 66 or older could “restrict” his or her application to dependent’s benefits only. As a Social Security purist, this always got my goat. Why, for example, should a guy who worked all his life be able to claim benefits intended for nonworking dependent spouses until age 70, and then reap a “delayed retirement” bonus to his own retirement check on top of that? There was simply no way that taxpayer rip-off could be justified.
The new law says that the deemed filing provision does not end at 66. It applies to everyone at all ages. But again, the new rules only apply to people turning 62 next year and later. So the loophole remains wide-open for lucky folks currently 62 or older to jump through for the next four years.
By the way, the restricted application rule always has, and still does, apply to widows and widowers. For example, a widow has always been able to claim reduced survivor benefits and then switch to 100 percent of her own at 66, or 132 percent of her own at 70. She will continue to be able to do that.
Finally, it looks like one dubious maximizing strategy was not on the chopping block. I call it a “dubious” strategy because I think people really need to think twice before employing it. It is usually called “start stop start.” You play this little game by taking reduced Social Security benefits at 62 and then at 66, suspending those benefits until age 70 in order to get the 32 percent delayed retirement bonus added to your reduced Social Security check. But in doing so, you are throwing away an awful lot of money between ages 66 and 70.
