Some Social Security Loopholes Will Still Be Around in 2016

In recent years, this magazine and our sister publication Kiplinger's Retirement Report have frequently alerted readers to opportunities to make the most of their Social Security benefits. Now, perhaps because we did our job too well, two popular strategies -- "file and suspend" and "restricting an application" (we'll explain in a bit) -- are being wiped out.

Both were created by the Senior Citizens Freedom to Work Act of 2000 to encourage workers to stay on the job and delay claiming Social Security. Doing so allows their benefits to grow to better serve them in retirement. That legislation passed unanimously. But as more people took advantage of the changes, yesterday's "freedom" morphed into today's "loophole." And just before Halloween, with no public hearings or debate, Congress voted to put the kibosh on what were termed "aggressive" claiming strategies.

But, and this is a big but, the lawmakers decided to give millions of Americans six months to take advantage of the old rules. Read on to see if you (or maybe your parents or grandparents) are among the chosen people.

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File and suspend. Once you reach full retirement age (FRA), which is now 66 but will gradually rise to 67 for those born in 1960 or later, you can claim your benefits and immediately tell Social Security not to pay you. The point of the pirouette is that only after you claim your benefits can others who qualify for payments based on your work record -- such as your spouse or dependent children -- receive those benefits. And if you suspend after turning on the spigot for them, you earn delayed retirement credits that will boost your benefit by 8% a year until you reach age 70.

The strategy is key to many plans to "maximize" lifetime benefits. If you live longer than the average life expectancy, getting higher benefits later (for yourself or as survivor benefits for a spouse) could more than make up for the cash you passed up earlier.

Here's an example: A husband who has earned a $2,200 monthly benefit files and suspends at age 66, making his nonworking wife (also 66) eligible for a spousal benefit equal to half that amount, or $1,100 a month. By suspending his benefits, the husband earns delayed retirement credits that will boost his payout at 70 by 32%, to $2,904, plus cost-of-living hikes between now and then.

As originally written, the new law was going to cut off anyone receiving benefits based on the record of someone who had suspended his or her own benefits. The checks to spouses and dependent children were to stop six months after President Obama signed the new law. But in a middle-of-the-night change, the lawmakers relented. Not only will those now benefiting from file and suspend continue to receive payments, but nearly 2 million other Americans will be allowed to age into using the "loophole." Anyone who is 66 by May 2 can capitalize on this strategy if it is advantageous. (As the deadline approaches, we'll write more about how to determine whether it makes sense for you and, if so, how to do it.)

Restricting an application. Although you can apply for Social Security benefits as early as age 62, waiting until FRA opens an important opportunity. Before 66, any application is considered to be a request for your highest possible benefit, whether based on your own work record or your spouse's. At FRA, though, you can "restrict an application" to spousal benefits only, even when that's less than you'd get on your own record. Why take a haircut? So your own benefit will grow at 8% a year until you turn 70.

The new law will eliminate this option for those who turn 62 after January 1. If you're older than that, you're grandfathered in and can still restrict an application once you reach age 66. Because file and suspend is disappearing, your husband or wife will actually have to be receiving payments for you to get spousal benefits.

Retroactive benefits. The strategies we just described benefited married couples. A third strategy being abolished helped singles, too. As a general rule, Social Security will not pay more than six months' worth of benefits retro­actively. But if you file and suspend at FRA, your suspended benefits are basically banked. At any time, you can claim all benefits due since age 66 as a lump sum, if you are willing to forfeit the delayed retirement credits that have accrued. That could be valuable if, say, your delayed-claiming strategy based on a long life expectancy is threatened because you become ill at 69. Under the new law, this "insurance" will be available only to those who turn 66 by May 2.

The impact. William Meyer's company, Social Security Solutions, offers sophisticated software to design strategies to maximize lifetime income from Social Security. He says the changes could cost a one-earner couple more than $60,000 in benefits between ages 66 and 70. He chafes at the notion that the targeted strategies were loopholes, and he worries about the long-term impact on lower-income and middle-class workers who now might claim benefits sooner rather than later, thus accepting lower payments for them­selves and their survivors. He argues that it's still important to consider the big picture. "It's not an easy, no-brainer decision," he says.