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Budget Act Cuts Social Security Filing Options

ElderlyCoupleCongress is about to curtail two little-known, but very useful, benefits of Social Security. These are the ability to file-and-suspend and to file a restricted application. At the time of this writing, Congress had not formally passed the bill but it was expected to pass within days.

Remember when Paul Ryan proposed we extend the full retirement age for Social Security from age 67 to 69 over a 40-year time period? The media went ballistic. Senior citizen groups sponsored TV ads of Paul Ryan dumping grandma over the cliff. His proposal never saw the light of day.

Fast forward to the current Bipartisan Budget Act of 2015, a bill that will cost Social Security recipients far more in benefits in the near future than Ryan’s proposal. Yet there has been nowhere near the outcry from the media, either political party, or the President.

Why? The benefits that the budget bill strips from the Social Security program are little known by the average American and a bit complex, even though they can add up to tens of thousands of dollars of immediate cash benefits for nearly all Social Security recipients.

What Congress passed, and the President says he will sign, ends a benefit called file-and-suspend. This applies to married couples. It allows the higher-earning spouse to file for Social Security at full retirement age (currently 66), but to suspend taking the benefit so it can increase by 8% a year until age 70. This enables the lower-earning spouse to begin receiving spousal benefits by filing a restricted application for spousal benefits only.  The lower-earning spouse’s own benefit continues to increase by 8% per year as well.

The legislation will disallow that benefit and restrict the lower-earning spouse from receiving the spousal benefit until the higher-earning spouse actually starts receiving payments. This means if you wait until 70 to take the highest monthly Social Security benefit possible, your spouse will also have to wait until you turn 70 to receive spousal benefits.

As an example, assume Tyler’s full retirement age benefit is $3,000 per month. His spouse Dana, the same age, has a full retirement benefit of $500. Under the current program, Dana could receive three times more, or $1,500 a month, at age 66, even though Tyler suspends his right to begin receiving his monthly benefit. By waiting until age 70, he would see his benefit grow to closer to $4,000 a month. Under this legislation, Dana would have to wait until age 70 to take the $1,500 spousal benefit. This costs the couple $1,500 a month for four years, or $72,000.

The second benefit stripped under this act affects everyone covered under the Social Security program, whether married or not. It is another option available when you file-and-suspend. Currently, when you hit full retirement age and decide to suspend taking your benefit, you have the option to change your mind at any time before age 70 and retroactively receive your benefits.

This benefit is incredibly valuable in certain cases. Suppose, for example, Edgar has decided to wait until age 70 to begin receiving benefits but, at age 69, he becomes terminally ill. He could file to retroactively claim all three years of lost benefits. If Edgar’s full benefit amount were $3000 a month, the total retroactive benefit would be $108,000. This option is wiped out under the legislation.

Those currently receiving these benefits will become grandfathered under the legislation and continue to receive them. However, anyone currently qualifying for file-and-suspend benefits but not receiving them has until six months after Congress passes the Budget Act to complete the filing process.

While not all Social Security recipients will be affected by these changes, for those who are the impact will be significant.

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2 Responses to Budget Act Cuts Social Security Filing Options

  1. Esther Kim November 2, 2015 at 10:26 am #

    Hi Rick, nice article. I’ve been reading a lot of other blog posts and articles on the Social Security changes, but yours was definitely the most clear and easy to understand. As a 401k provider, most of our communication is geared towards the small business owner/employer audience. But I hear the importance of individuals understanding the Social Security changes, and would love your thoughts on what content you think is important for 401k providers to produce.

    Also, how does this affect spouses already taking Social Security? For example, what if Dana’s 66 y/o now and already taking spousal benefits?

    Thank you!!

  2. Rick Kahler November 2, 2015 at 12:12 pm #

    My understanding is if you have already filed and suspended and your spouse is taking their spousal benefit, you are grandfathered in. If you were born in 1953 or earlier you will also be able to file-and-suspend, which allows you the option to retroactively receive your benefits. And, things could change until it is signed by the President.