One Social Security strategy to bite the dust

Brian J. O'Connor
Detroit News Finance Editor

A little-used but increasingly popular strategy retirees could use to add more than $50,000 in Social Security benefits over their lifetimes will end in six months, as part of the two-year budget accord President Barack Obama signed Monday.

The strategy — a multistep approach to claiming benefits called “file and suspend” — was considered at odds with the basic purpose of Social Security by some critics, while others saw it as the rare tool retirees could use to boost their incomes, especially low-income workers. The file-and-suspend option will be eliminated in 180 days from the bill’s signing, but people already claiming those benefits will continue to collect.

The changes affect two rules put in place in 2000 that were designed to give workers flexibility in claiming their Social Security benefits while being able to continue to work or return to work, explained Alicia Munnell, a management professor and director of the Center for Retirement Research at Boston College. But by applying those rules in just the right order, couples could have at least one spouse continue to work while the other spouse started collecting benefits, while also maximizing the total lifetime benefits for both spouses.

“The intent of Social Security is to provide income that’s lost when the breadwinner stops working,” Munnell said. “The thing that was unfair was that your spouse started collecting benefits while you kept working, and that just thwarts the intent of Social Security.”

Larry Kotlikoff doesn’t see it the same way. A professor of economics at Boston University, Kotlikoff literally wrote the book on file-and-suspend, “Get What’s Yours: The Secrets to Maxing Out Your Social Security.” He’s also president of Economic Security Planning, an online service that calculates how to maximize lifetime Social Security benefits.

Kotlikoff gave the example of his secretary, who works two jobs so that her husband can care for their disabled son. Using the file-and-suspend strategy in the years before she retires would give her extra income and allow her to work just one job.

“Somebody’s view of unfair is someone else’s view of perfectly fair,” Kotlikoff said. “I think my secretary doesn’t need to work 80 hours a week just because she’s got a son who’s physically handicapped. You can’t call this a loophole. You could call the whole system a loophole. This is just an excuse to cut something.”

File-and-suspend works like this: Jeff is a high-income worker born in 1949 who hits his full retirement age of 66 this year, making him eligible for the maximum monthly Social Security benefit of $2,663. Jeff knows that if he doesn’t claim benefits until age 70, his monthly payment will increase by 8 percent a year. So he suspends his benefits. But because Jeff has filed, his wife, Judy, can now claim half of his spousal benefit, if she is at the full retirement age, or a reduced amount if she is between 62 and her full retirement age.

When Jeff reaches age 70, he then files to collect his maximum retirement benefit, and Judy can do the same when she reaches her full retirement age. That means Judy can collect $63,912 in spousal benefits during the four years they both still work, plus the increase in the monthly payment they both will collect by waiting to claim their own benefits at age 70.

There are several variations on the best outcome for file-and-suspend, and it’s not the best strategy for even the majority of couples, according to one study.

But file-and-suspend has gotten a lot of publicity in the past few years, even though Munnell says less than 1 percent of all Social Security recipients use the strategy. But if file-and-suspend and a similar tactic was employed by everyone eligible, she estimates the costs to Social Security could be $10 billion a year. Based on September figures, the additional benefits would be less than 1.5 percent of what will be about $700 billion in Social Security pension payments made this year.

According to an estimate from the Social Security system’s chief actuary, the long-run savings of eliminating file-and-suspend and other tactics will cut two-tenths of 1 percentage point from the long-term Social Security deficit.

Workers turning 66 this year will have six months to claim benefits using file-and-suspend, and the new rules are motivating them to make a decision, said Gary Nustad, executive director of strategic development for Michigan Financial Companies, a financial advisory headquartered in Southfield. Michigan Financial ran one of its regular seminars on maximizing Social Security benefits Wednesday night in Sterling Heights.

“We had 30 people coming to this event as of yesterday and we have 50 now,” Nustad said Wednesday.

He emphasized that just because file-and-suspend would be ending, workers should research or consult with financial advisers in figuring the best strategy to claim their benefits.

“It has always been the best option for couples to look at in terms of maximizing their benefits, but I would stress that file-and-suspend is not the only thing people can do,” Nustad said.

While workers who won’t get to their full retirement age by May won’t be able to use file-and-suspend, Social Security experts say that, overall, the changes in the budget bill will help a number of people claiming benefits.

The bill eliminates a 20 percent cut that recipients of Social Security Disability beneficiaries were facing, and keeps about 16 million Medicare Part B recipients from being hit with a monthly premium increase of $45.60. And the budget deal also avoided a a threatened government shutdown and default on the U.S. debt threatened by Republicans, which has created enough economic chaos in the past to cut 1 percent of the country’s economic growth.

“Stuff got done that needed to get done,” said Munnell of the Retirement Center. “We’re not going to have a shutdown of the government and play chicken with the debt ceiling. That seems great to me.”

The fact that Social Security became part of the budget deal surprised many Social Security experts, who point out that Social Security is financed completely outside of the regular federal budget, by law. The changes to Social Security retirement and disability rules in the bill weren’t debated or even known beforehand, said Nicole Woo.

“The general idea that Social Security would be in this budget deal does irk a lot of folks who are experts in Social Security and are trying to protect the system from cuts,” Woo said. As for eliminating file-and-suspend, the move was most likely prompted by a pet peeve of one of the budget negotiators. Said Woo: “I think that rule was annoying somebody who probably was in the room.”

Twitter: @BrianOCTweet

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