The file-and-suspend Social Security strategy that many Americans had worked into their retirement plans has quietly gone away for future retirees in a little-known section of the Bipartisan Budget Act passed by both houses and signed into law by President Obama on Nov. 2.
The bill, which slipped through Congress with no public hearings or fanfare, summarized the file-and-suspend change as follows: Provisions in the Social Security Act related to deemed filing, dual entitlement and benefit suspension are amended to prevent individuals from obtaining larger benefits than Congress intended.
Many married couples use the file-and-suspend strategy by having the higher wage earner file for benefits and then immediately suspend them so that the lower earning spouse can claim spousal benefits while letting their own Social Security grow at a rate of 8 percent a year until age 70.
But the new law eliminates this option, generally for Americans born after Jan. 2, 1954. Birthdates are key. People already taking advantage of the strategy would basically be grandfathered in and continue to receive benefits, and people who are already 66 or will be 66 within six months of the signing of the law – May 1, 2016 – may still file-and-suspend under the previous law.
Taxpayers who are age 62 or older by Dec. 31, 2015, may claim spousal benefits when they turn 66 if their spouses have claimed Social Security or have filed and suspended benefits before the May 1, 2016, deadline.
The law was enacted to help keep the Social Security Trust Fund solvent beyond 2034 as the huge Baby Boom generation retires. Social Security’s retirement funds are sufficient through 2033, according to the U.S. Treasury. After 2033, the dedicated payroll tax will be sufficient to fund three-quarters of scheduled payments until 2088 with annual income coming into the fund. Legislation would need to be enacted to restore long-term solvency by that time.
For more information about this new law and how it could impact your retirement savings, contact your financial adviser.