Over the years, you’ve probably noticed headlines warning about the substantial changes that experts believe are coming to Social Security. While these headlines are intended to scare you, the one thing that you could always count on was that whatever changes were being promised were only going to happen “at some point in the future.”
Welcome to the future.
What Just Happened?
Late last week, Congress voted to disallow a common Social Security filing strategy called “file and suspend.” On Monday, November 2nd, as part of the larger budget bill, the president signed this revision into law.
What is File and Suspend?
Most people understand that the longer you wait to claim Social Security, the larger the monthly benefit you’ll receive. What you may not know, is that the amount of Social Security you receive is determined using something called the Primary Insurance Amount (PIA). Simply, people who wait until full retirement age (currently 66) receive 100% of their PIA, whereas people who begin taking benefits at age 62 receive 75%.
Once you begin taking benefits, other than cost of living adjustments (more on that in a future newsletter), your benefits cease to grow.
File and suspend allows a person who has achieved “full retirement age” to file for Social Security, turn around and immediately suspend the payments, then subsequently have their partner file for a “spousal benefit.” (A spousal benefit entitles the partner to receive 50% of the “full retirement age” beneficiaries’ Social Security amount.) Next, the full retirement age spouse waits to refile (often until age 70), all while the benefits they will eventually receive grow by as much as 8% a year. Later, once they reach full retirement age, the partner receiving the spousal benefit files for their own Social Security, and in the process can earn several more years of delayed retirement credits.
The advantage of file and suspend is that, over the course of a typical retirement, couples (there are provisions for certain singles, as well) receive more money. How much more? According to AARP, based on current life expectancies, a properly-managed file and suspend strategy increases a couple’s lifetime Social Security income by $136,088.00.
Who’s Most Impacted?
The impact will be widespread, but will be especially painful for those people who have not saved enough for retirement, and who were depending on the popular filing strategy (which can add as much as $800 a month in income) to help make ends meet.