How the Bipartisan Budget Deal Could Affect Retirement Planning

The Bipartisan Budget Act of 2015, inked last week, made retirement planning just a wee bit simpler for retirees, but not many seem especially happy about it.

While many folks focused on the fact that the deal boosted spending and raised the debt ceiling, buried deep within this fiscal deal was a matter of more importance for many retirees: Section 831, titled, “Protecting Social Security Benefits.” Protecting, in this case, means ending a popular retirement income strategy called “File and Suspend.”

How is File and Suspend Used for Retirement Planning?

For those unfamiliar, file and suspend is a strategy typically used by married couples allowing the higher earning spouse to maximize his or her monthly benefit by delaying receipt of payments while the couple still receives some Social Security income.

This strategy takes advantage of two major provisions in Social Security:

1. If you delay payments beyond full retirement age (65 – 67, depending on your year of birth), your annual benefit will rise 8% annually until age 70.
2. The act of filing for Social Security allows one member of the household to file for spousal benefits, which amount to 50% of the full retirement age benefit earned by the primary breadwinner.

Where Did File and Suspend Originate?

File and suspend strategies are relative newcomers to the Social Security stage, and they are one plank that added a lot of complexity to the now-or-later decision retirees faced.

They were born in 2000, when the government passed a Social Security reform designed to give beneficiaries flexibility, called “The Senior Citizens Freedom to Work Act of 2000.” Under the law, a beneficiary filing at his or her full retirement age could, at any point thereafter, suspend benefits and go back to work.

The Freedom to Work Act was developed in an effort to give people an incentive to work longer and/or rejoin the workforce should they so choose. As a carrot, those suspending payments would begin earning credits. But there was an unintended consequence—file and suspend.

How Did File and Suspend Work?

Here is how it works. (Errrrr … worked.) At full retirement age, the higher earner files for Social Security—but then immediately suspends payments (hence the name, “file and suspend.”) The simple act of filing however, allows the breadwinner’s spouse to file for spousal benefits, while the suspended payments begin to rise over time. Essentially, a married couple could collect one stream of spousal income until age 70, while simultaneously earning money from the primary earner’s salary.

Then when the primary earner officially retires, the married couple could restart the primary earner’s payments at the new, higher rate. Heck, if eligible, the spouse would also have the option of ceasing spousal benefits and kicking in his or her own Social Security, which would also have risen 8% annually along the way.

Why File and Suspend Was Good for Retirement Planning

Financial planners have long hailed the fiscal benefits of delaying payments as long as possible, as the larger benefit (guaranteed for life) frequently results in you receiving more money in total. Additionally, retirees receive this stream of income later in life, when medical costs could be biggest. (There were other benefits for surviving spouses too, but it makes little sense to detail them, as they are eliminated now.)

The Unpopularity of File and Suspend 

While this strategy was extremely popular in the financial community, it was also quite politically unpopular, as some label it an abuse of the system benefiting the wealthy. Not only that, but file and suspend is very costly as it does result in far greater total benefits paid. President Obama’s 2014 budget proposal included a provision eliminating this practice. That provision is now part of the new fiscal deal.

Retirement Planning: Winners and Losers

Now, this raises a few considerations. One, at a broad level, this move positively proves Social Security is not a political third rail, and reforms will be made when there is sufficient political will. It also simplifies retirement planning, as this is now much more of an on-or-off decision than a partial one.

But, in a more timely sense, it creates winners and losers. Those under age 62 today will simply not have this option at full retirement age. But, uncommon for entitlement reforms, some close to retirement will see an impact, too. Six months from now, those counting on using file-and-suspend Social Security strategies will have to look another way. The final bill does grandfather those who already made elections under pre-existing law, but if this was part of your plan, think again

Overall, according to Boston University Professor Laurence Kotlikoff, this reform can mean a couple receives up to $50,000 less in lifetime benefits. If you are currently using a file-and-suspend strategy, the chances are this bill hits you in the wallet. We would strongly suggest reviewing your retirement planning strategy now, before this takes effect.