Breaking News: Major Changes Coming to Social Security Filing Strategies

After the market crash of 2000, Congress passed the Senior Citizens Freedom to Work Act. This law was intended to enable people who had previously retired and claimed their Social Security benefit to stop receiving their monthly check while they returned to work and continued earning retirement credits. Doing so would enable the worker to earn more income while increasing their future Social Security benefit.

An unintended consequence of this adjustment was that it enabled U.S. citizens to explore and take advantage of various strategies to maximize their Social Security benefits that were outside the intentions of the law. These strategies became known as the “file and suspend” strategy, and the “restricted application” strategy.

As part of the 2016 budget, President Obama and Congress intend to prohibit people from utilizing these strategies going forward. At the time of this publication, these proposed changes are not yet law. Although both the House of Representatives and the executive branch have signed off on these bills, they still need to be approved by the Senate before the laws go into effect. However, this is expected to occur with minimal modifications within the first week of November.

Let’s dive into the differences between the “file and suspend” and the “restricted application” strategies as well as the steps you may need to take if currently utilizing one of these strategies.

File and Suspend

The file and suspend strategy is when Spouse 1 files for Social Security and then immediately suspends the benefit. This can be beneficial because it could possibly enable the individual’s spouse to begin collecting a spousal benefit based on Spouse 1’s work history. Further, it would enable Spouse 1 to collect delayed retirement credits until age 70, getting an 8% per year raise in monthly Social Security payments.

The U.S. government has concluded that this strategy is abusive of the Social Security system in that it is essentially double dipping as it allows a couple to begin collecting a benefit based on one spouse’s work history while at the same time collecting delayed retirement credits on the same work history.

At this time, it appears that this strategy will no longer be allowed beginning six-months from the date the law is passed. Further, it is currently unclear what action will be taken against those who have already utilized this strategy. It currently appears possible that couples who have already started this strategy will be allowed to complete the process. Alternatively, it is possible that couples who have started this process will no longer be entitled to the spousal benefit they are currently receiving until Spouse 1 begins claiming his Social Security benefit, at which time the spousal benefit for Spouse 2 would continue. In a worse-case scenario, it is possible that the U.S. government may attempt to recollect any benefits that are no longer allowed from couples who have already taken advantage of this strategy. (I believe this is the least likely result, as it would be hard to take money away from people who have already collected it.)

Steps to Take If This is You

Suppose your spouse is currently collecting a spousal benefit based on your work history, although you are not currently collecting your own Social Security benefit. This would be a scenario resulting from the use of the file and suspend strategy.

If this is reflective of your situation, then significant adjustments might need to be made as this law becomes more concrete. It is possible that you will either need to start claiming your own benefit in order for your spouse to continue receiving their spousal benefit, or your spouse will need to stop collecting any benefit until you file to receive your own benefit. Again, these kind of adjustments will likely be implemented six months after the bill is finalized.

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