Collecting and delaying Social Security benefits will no longer be an option for married couples
In light of new law that will eliminate two popular strategies, married couples retiring in the future need to rethink how to maximize payouts
Editor’s note: This article has been reviewed for changes following the passage of the 2017 Tax Cuts and Jobs Act. The information provided in this article was not affected by the 2017 TCJA.
As many people nearing retirement know, delaying the start of Social Security benefits usually means getting a better payout.
But for many years, married couples have used two popular strategies to collect some benefits now, and let other benefits mature for maximum effect.
The Bipartisan Budget Act (HR 1314) eliminates these strategies, which remained available only for a limited time.
How retirement affects Social Security benefits
First, it’s important to understand how an individual’s age at retirement affects Social Security benefits. In this context, “retirement” means the date an individual starts collecting Social Security benefits, not necessarily whether the individual is still working.
An individual who starts collecting at full retirement age receives his or her full retirement benefit available, called the primary insurance amount. Social Security law sets full retirement age based on an individual’s year of birth. The primary insurance amount is based on the individual’s work and earnings record.
For people born between 1943 and 1954, full retirement age is 66. Benefit amounts vary if a person retires before or after that age:
- If the individual retires at 62, he or she receives 75 percent of the primary insurance amount.
- If the individual waits until 70 to retire, he or she receives an extra 8 percent per year, or 132 percent of the primary insurance amount. This increase is called a delayed retirement credit.
For example, suppose an individual born in 1950 has a primary insurance amount of $1,000 per month. If she retires at 62, the monthly benefit is $750. If she retires at 66, she receives the full $1,000. If she retires at 70, the monthly benefit is $1,320. Note that if she continues to work and pay FICA taxes after reaching full retirement age, she might collect even higher benefits when she retires.
See Effect of Early or Late Retirement on Retirement Benefits for all benefit reductions and increases for all age groups and retirement ages.
How married couples collect and delay benefits
Married couples frequently use two popular strategies to maximize their retirement benefits. Both methods essentially allow couples to collect some benefits and delay other benefits. Here, we’ll look at each of them, and how they’re changing.
The restricted application method
The restricted application method allows an individual who was born before January 2, 1954, and who has reached full retirement age to collect Social Security benefits on his or her spouse’s account, but not on his or her own account.
For example, Ella is 66, and her husband, Sal, is 67. Ella’s primary insurance amount is $900, and Sal’s is $1,200. Sal started his Social Security benefits when he turned 66 the previous year. Ella would like to continue working – hopefully until she is 70 – but she wants to collect some Social Security benefits to supplement the couple’s income in the meantime.
Under the restricted application method, Ella could start spousal benefits on Sal’s account. She would collect half of Sal’s benefit, at $600 per month. When she turns 70, she could switch to her own retirement benefits. At that point, she would receive at least $1,188 per month.
For this reason, the restricted application method is sometimes called “free spousal benefits.” Ella would receive “free” benefits as a spouse until she turns 70, when she would receive her primary insurance amount with the maximum delayed retirement credit. Even if Ella retires before age 70, she will still get a delayed retirement credit of 8 percent per year.
If spouses collect, they will not be able to delay their own benefits
Under the new law, if an individual files for spousal benefits, the government will consider the individual to have filed for his or her own retirement benefits.
- People who were already using the restricted application method can continue using it.
- People who turned 62 after 2016, can’t use the restricted application method.
- People who turned 62 before 2016, can use the restricted application method when they reach full retirement age.
Suppose in our example that Ella is a bit younger and affected by the new law. The change means that if Ella files for spousal benefits, the government will consider her to have filed for benefits on her own account. Benefits on her own account could increase because of additional work and cost-of-living increases, but, once she starts collecting, she will forever lose her opportunity for delayed retirement credits.
The “file and suspend” strategy is eliminated
The new law also eliminates the file and suspend method of claiming Social Security benefits. This method allowed an individual to file for Social Security benefits (thus allowing his or her spouse to begin collecting) but suspend his or her own benefits to get delayed retirement credits.
For example, Lil and Paul are both 66. Paul’s primary insurance amount is $2,000 per month. He wants to wait until age 70 to start his benefits. Lil does not have Social Security coverage of her own.
Under the file and suspend method, Paul can file for Social Security benefits and immediately suspend them. This will allow Lil to begin collecting a monthly benefit of $1,000. When Paul retires at 70, he’ll collect the maximum delayed retirement credit and receive a benefit of at least $2,640 per month.
Suspended benefits frozen for everyone
Under the new law, if an individual files and suspends benefits, no other family member can collect benefits on the account.
- This provision takes effect April 30, 2016.
- Couples who used the file and suspend method prior to this date can continue using it.
- People who will reach full retirement age before this change takes effect can apply for benefits using the file and suspend method.
Suppose Lil and Paul turn 66 in October 2016. The change means that Lil must wait until Paul starts collecting his Social Security benefits to collect her spousal benefits. If he files and suspends, then her spousal benefits will not be available either.
Also, under prior law, Paul could have suspended his benefits and later changed his mind, allowing him to collect benefits retroactively from his full retirement date to the point that he withdrew the suspension. Under the new law, once an individual suspends benefits, he or she can only resume them prospectively.
Note: Someone who has never filed for benefits can receive up to six months of retroactive benefits.
Married couples nearing retirement may need to rethink their strategy
Taxpayers who are already using one or both of these strategies or qualified to use them before the changes went into effect, are not impacted by the new law. But married couples nearing retirement who want to maximize their Social Security benefits should re-evaluate their strategies with these changes in mind.
As before, delaying retirement results in higher benefits, but options to collect and delay, which Congress considered to be loopholes, will soon be unavailable.