File and suspend won’t be suspended … just yet

Obama budget proposal seems to target some Social Securities claiming strategies but this popular one is safe - for now.

While I was on vacation last week, several Investment News readers sent me links to a Reuters news article warning that the Social Security “file and suspend” strategy was under attack from the White House.
They asked if I knew about it and what I thought of the proposal that called for the elimination of “aggressive Social Security-claiming strategies.” Yes, I did. In fact, I wrote about it three weeks ago.

Buried on Page 150 of the president’s $3.9 trillion budget proposal for fiscal year 2015 was this one sentence: “In addition, the budget proposes to eliminate aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.”

That was it. No explanation. No additional comments.

But don’t worry just yet. The ability to have clients use the “file-and-suspend” claiming strategy at full retirement age in order trigger Social Security benefits for a spouse or minor dependent child while the worker’s own benefit continues to earn delayed retirement credits seems safe for now.

The strategy can also be used by any clients — including unmarried individuals — to lock in a filing date for Social Security benefits. That allows them to change their mind about delaying benefits and to request a lump sum payout back to the suspension date, in lieu of delayed retirement credits.

Changing this claiming strategy, which arose from the Senior Citizens’ Freedom to Work Act of 2000, would require an act of Congress. And that doesn’t seem to be in the cards any time soon. At this point, the president’s budget is a political document rather than an accounting ledger — more wish list than serious legislative agenda.

But that doesn’t mean that file and suspend is here to stay.

I imagine that when Congress — or a presidentially appointed bipartisan commission — gets around to tackling needed Social Security reform, this claiming strategy will be high on the target list. But that could be years or even decades from now.

The Social Security Old Age trust fund that pays retirement and survivor benefits is due to run dry in 2033. At that point, Social Security could pay out only about 77% of promised benefits from payroll tax revenue unless Congress intervenes. The last time Social Security was on the verge of financial ruin was in 1983 and Congress stepped in with critical financing reforms in the nick of time.

Plus, Congress seldom enacts laws retroactively, and with a critical retirement income program like Social Security, any changes to how benefits can be claimed would likely have a long lead time. Many of the changes from the 1983 reforms didn’t take effect until 17 years later and the full phase-in of the higher retirement age of 67 is still years away.

You might wonder how and why the file-and-suspend strategy came about in the first place.

The primary goal of the Senior Citizens’ Right to Work Act was to encourage individuals to continue working at older ages by eliminating the annual retirement earnings test after an individual reached the full retirement age.

The file-and-suspend strategy was a byproduct of this law. For couples, this strategy lets the worker claim benefits and immediately suspend receipt of them, allowing his spouse to claim spousal benefits, while he continues to delay his benefits and earn delayed retirement credits.

In today’s low-interest rate environment, when many people plan to work longer and are likely to live longer than previous generations, increasing Social Security payments by 8% per year for every year benefits are postponed beyond full retirement age up until 70 makes sense for many clients. The primary candidates are those who healthy and who have other financial assets to draw on in the interim.

As long as this option remains on the books, it should be considered as part of your clients’ overall retirement income plan. But financial advisers need to remain flexible. What works for current and near-retirees may not be available for future retirees.