Some couples will be getting less from Social Security than they expected after Congress passed a budget deal early Friday that changes the way you can claim your benefits.
It could take away tens of thousands of dollars for some couples over the course of their retirement.
The rule change goes into effect for new retirees starting in six months. It eliminates a claiming strategy known as “file and suspend.”
Basically, it takes away up to four years of spousal benefits that some people claim before filing for their own benefits.
This is how it works: At age 66, Joe files for his benefits but immediately suspends them. That means his wife, Jane, can start receiving spousal benefits, equal to half of Joe’s full benefit, while Joe’s benefit keeps growing for another four years.
Say those checks are $500 a month for Jane. That can amount to $24,000 between the ages of 66 and 70.
Meanwhile, Joe will wait until 70 to start getting his Social Security checks. By waiting to take his benefits, the amount of Joe’s monthly check will grow by 32%. If he was going to get $1,000 a month starting at age 66, he’ll get $1,320 a month for the rest of his life by waiting until 70 to collect.
Starting in six months, new retirees won’t be able to claim their benefits this way. Jane won’t be able to get her $500 a month unless Joe starts getting his Social Security checks, too. They either both start claiming at regular retirement age, or both wait until 70. (There’s no benefit to waiting any longer because your benefit won’t get any larger than it is at age 70.)
A study from The Center for Retirement Research at Boston College estimated that about 27% of couples could use the “file and suspend” strategy and the cost to the program would be about $500 million if everyone eligible took advantage of it.
The Social Security Administration said it did not have data to show how many couples file benefits in this way. But it estimates that the change won’t save the program any money for the first 10 years, but would result in some cost reductions after 2025.
The “file and suspend” strategy has only been allowed since 2000. Critics say it was mostly used by high-income Americans who were gaming the system.
The Obama Administration has called it an “aggressive Social Security claiming strategy” and Congress’ budget deal refers to it as an “unintended loophole.”
“It’s mostly people that have access to advisers that are able to learn about these strategies,” said Ric Edelman, CEO of Edelman Financial Services.
But economist Laurence Kotlikoff called the policy change a “terrible piece of legislation” and says that it’s not just the rich that file for Social Security benefits this way.
“It might save a little bit of money, but it’s pulling the rug out from people who planned on getting this money,” Kotlikoff said.