- There are at least three types of retirement income available under Social Security.
The Spousal benefit
The survivor benefit
- for the proposes of this post we'll focus only on the workers and spousal benefit.
Before 2000, if a worker delayed collection of Social Security benefits, the spouse could not collect spousal benefit nor get "delayed retirement credits", which usually is thought of as being the greater of the individual account amount or half of the spouse's benefit, if it is bigger. someone at "full retirement age" could get to choose between spousal benefit or the workers benefits if bigger.
The individual can also file a "restricted application" and take one or the other benefit while deferring the other benefit.
The reason to defer benefit past normal retirement age would mean that the deferred benefit get cost of living adjustment in addition to growing at 8% per year until age 70 so the worker can get a much bigger monthly Social Security monthly payment at age 70.
In addition the retiree can collect between ages 66 and 70 one half of the a spouse's benefit.
Not a bad deal, if you live long enough, sometimes referred to as "free spousal benefit."
We must remember three things:
- it only works if both husband an wife attained full retirement age of 66 or else the younger than full retirement age spouse (say age 62) will be "stuck" with lower benefit permanently.
- Spousal benefits do not earn "delayed benefits credits" so they will not get any advantage for them in taking their own worker benefit at age 66 and waiting to age 70 to switch to the "spousal" benefit.
- Current law says that a spouse can't claim "spousal" benefit, unless the other spouse claims benefits first, so if the wife for instance wishes to retire and collect benefits and the husband wants to keep working til age 70 it could be an issue.
Although it's technically available to anyone, the White House feels that this strategy is being used unfairly by high-income seniors and wants to shut it down because of the added benefit cost it will impose on the Social Security program.
Any change to " file-and-suspend" would require congressional action, so don't expect anything soon. But words like "aggressive" and "manipulate" are unusually strong for a federal budget document, so let's inspect what "file-and-suspend" is about - how it's used and whether it makes sense to eliminate.
Anyone can boost their annual Social Security benefit through delayed filing.
Benefits are calculated by using a formula called the primary insurance amount, or PIA.
Workers who wait to start receiving Social Security until their full retirement age (currently 66) receive 100 percent of PIA while choosing to take benefits at 62, the first year of eligibility, gets 75% of PIA. The higher benefit is enhanced by Social Security's annual cost-of-living adjustment, which would be added back in for any years of delayed filing.
Filing later means higher annual income for life, which can be a wonderful hedge against the risk of running out of money in old age. But it can mean fewer years of benefits depending on longevity. There are several ways to use this feature, but we usually recommend it in order to lifetime benefits for married couples.
Here's how it works: The spouse with the higher PIA - typically the husband will file for benefits at his full retirement age, then immediately would file to suspend payment of those benefits. This will permit the lower PIA spouse to file for spousal benefit, which is equal to half the husband's benefit.
This strategy will get some benefit flowing to the household while the husband continues to accrue higher benefits until he files to start payments as late as age 70. The wife can then convert to her own full benefit.Remember: The wife can only convert to her full benefit if she waits until she is at "full retirement age" of 66 to file for a spousal benefit.
The couple can benefit from higher individual benefits for the rest of their lives. If the husband dies first, the widow gets the survivor benefit, or the higher of the two benefits.
How much can this strategy be worth? Consider an example of of Bob and June, a married couple both turning 66 this year. Filing this year at their "full retirement age", Bob can get a PIA of $2,000, while June collects $1,600 per month. If Bob survives to 83 and June lives to age 95, their cumulative lifetime Social Security benefit will amount to $1,032,384, according to the T. Rowe Price Social Security Benefits Estimator (http://trowe.com/1iwbrKE).
Should Bob "file and suspend", and June immediately files for a spousal benefit, she'll collect $12,000 per year. When they both turn 70, Bob can file to start payments and June may convert to her own full benefit. Their cumulative lifetime benefit would increase by $136,088, to $1,168,472.
More importantly, June would maximize her benefit toward the end of life, when she is most likely to have used up her other resources. Her annual benefit in 2042, at age 94, will be $31,680or $7,360 higher than if she and Bob had simply filed at 66.
Smart enough to collect 50% in additional benefits? Perhaps, however it is completely legal, approved by the United States Congress and signed into law by President Bill Clinton as part of a broader law called the Senior Citizens' Freedom to Work Act of 2000.
The main point of the law was to give people incentives to work longer by allowing them to work and receive full Social Security benefits after they have reached their "full retirement age."
The law's "file and suspend" provision permits married couples to start receiving some benefit to meet their living expenses while they wait in order to collect more later.
The law didn't get much attention until a few years ago, when the media started writing about it.
A growing number of Advisors are recommending this strategy to the families they service. It's also getting exposure through online services that help people maximize benefits.
"File and suspend is still a small phenomenon, and the Social Security Administration doesn't have enough data on its cost to the system's finances, but the Obama administration seems interested in nipping it in the bud and makes the case that benefits flow to wealthy households that need it least.
"These strategies are sometimes marketed by financial advisors to upper-income beneficiaries who can afford to wait until they are older to claim their benefits," a White House official said.
The jury is still out on whether "file and suspend" works only for the wealthy. Research by the Center for Retirement Research at Boston College found that 46 percent of "file and suspend benefit flows to the top 40 percent of households, as measured by wealth. These are the households that are able afford to work with financial advisor, or able to "leave money on the table" while they delay a portion of their benefits by using their own retirement accounts to generate income to meet living expenses.
At the same time, delayed claiming strategies - of any sort - should benefit lower-income households most, since they rely most on Social Security as a source of "replacement income" during retirement.
"It's not just for rich people," says William Meyer, co-founder of Social Security Solutions.com, a fee-based service that helps people maximize benefits. "For many middle-income American couples, it's a great strategy for the highest earner to get the delayed credit as high as possible."
We will see much more debate and discussion on this than a single paragraph in the federal budget - perhaps as part of a broader discussion of Social Security reform before things settle on this issue.
The opinions and information shared are not meant as a recommendation to postpone collecting Social Security benefit or as a recommendation to purchase any service or product and are meant for eduction purposes only. When determining your own Social Security eligibility and filing for benefits you should consult the Social Security administration or a qualified financial advisor.
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