After the market crash of 2000, Congress passed the Senior Citizens’ Freedom to Work Act, which was designed to stop people who had previously retired and who were claiming Social Security benefits from receiving their monthly check while again went to work and could continue to earn their retirement. This would enable the worker to earn more income while increasing his future social security.
An unintended consequence of this adjustment was for US citizens to explore different strategies and take advantage of them to maximize their social security benefits that were beyond the intent 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 want to ban people from using these strategies in the future. At the time of this publication, these proposed changes are not yet a law. Although both the House of Representatives and the Executive have signed these bills, they still have to be approved by the Senate before the laws come into effect. However, this is expected to occur with minimal adjustments in the first week of November.
Let’s look at the differences between the ‘file and pause’ and ‘limited application’ strategies, as well as the steps you may need to take if you’re currently using any of these strategies.
File and suspend
The file and suspension strategy is when spouse 1 applies for social security and then immediately suspends benefits. This could be beneficial as it could potentially enable the individual’s spouse to collect spouse benefits based on the work history of spouse 1. Furthermore, it would allow spouse 1 to receive delayed retirement credits up to age 70 , with an increase of 8% per year in monthly social benefits.
The United States. the government has concluded that this strategy abuses the social security system because it is essentially double immersion, as it allows a couple to start receiving benefits based on a spouse’s employment history while simultaneously collecting delayed retirement credits for the same employment history.
At this point, it appears that this strategy is no longer allowed from six months from the date of the adoption of the law. Furthermore, it is currently unclear what action will be taken against those who have already used this strategy. It currently seems possible that couples who have already started this strategy may be allowed to complete the process. Alternatively, couples who have begun this process may no longer be entitled to the spouse benefit they are currently receiving until Spouse 1 starts claiming social security benefit, after which spousal benefit for Spouse 2 would continue. Worst case scenario, the US may allow the government to try to withhold any benefits that are no longer allowed from couples who have already used this strategy. (I think this is the least likely result as it would be difficult to take money from people who have already collected it.)
Steps to take if you are
For example, suppose your spouse is currently receiving spouse benefits based on your employment history, although you are not currently receiving social security benefits of your own. This would be a scenario due to the use of the file and the suspension strategy.
If this reflects your situation, significant adjustments may need to be made as this act becomes more concrete. You may either have to claim your own benefit so that your spouse can continue to receive his or her partner benefit, or your spouse may have to stop receiving benefits until you apply to receive your own benefit. Again, such changes are likely to be made six months after the bill is finalized.
Alternatively, and depending on how the law has been agreed, some people who wish to take advantage of the “file and suspension” approach may actually accelerate their implementation of the strategy to start the process before the six month period On.
The limited application strategy differs somewhat from the file and suspension strategy in that spouse 1 submits files for its own benefits and never stops collecting that benefit. This can still be beneficial, however, as spouse 2 is given the option to immediately start a spouse benefit and defer her own benefit until she reaches the age of 70. Again, this can be helpful because spouse 2 provides some form of Social Security (the spousal benefit) as soon as spouse 1 applies, but also allows the same spouse to continue collecting deferred pension credits on her own work history. When they reach the age of 70, spouse 2 can switch from collecting spouse benefit, which was based on spouse 1’s employment history, to collecting their own social security benefit that has built up delayed retirement benefits, even during the years when matrimonial benefits benefit was received.
Again, with a filing and suspension strategy, spouse 2 receives a spouse benefit even though spouse 1 immediately suspended his benefit and is currently collecting deferred retirement credits. With the limited application strategy, spouse 1 never has to suspend the collection of his own benefit and spouse 2 can still receive a partner benefit while earning deferred pension credits on her own work history. In the future, the United States government will want to ensure that each spouse receives a benefit (either an individual benefit or a benefit to spouses) or earning deferment from retirement, but not both.
However, the limited application strategy is gradually phased out over a different time period than the file and suspension strategy. Quite simply, as long as a person reaches the age of 62 by the end of 2015, they may use the limited application strategy. Conversely, people who are not 62 years of age before the end of the year will not be able to take advantage of the limited application strategy.
Steps to take if you are
As long as both spouses are at least 62 before the end of the year, your strategy is unlikely to be interrupted. However, if a spouse is not 62 before the end of the year, your strategy probably needs to be reconsidered.
Speak to your financial planner
If you have any questions about the impact of these changes on your social security benefits, please contact your financial advisor.