Lawmakers in Washington did something unusual this week: they got something done. They crafted a budget bill with enough bipartisan support to pass, which should help the country avoid the possibility of another government shutdown or a breach of the debt ceiling through 2016. As most of the country breathes a sigh of relief, many pre-retirees are finding that they likely won’t be receiving as large of a benefit out of their Social Security as they had previously expected. That’s because the budget deal includes a surprisingly impactful provision: the end of a strategy known as “File and Suspend.”
File and Suspend became possible after a law passed by Congress in 2000 called the Senior Citizens’ Freedom to Work Act, which aimed to encourage senior citizens to work in retirement if they wanted to. Many argue that the strategy is an unintended loophole that allows married couples to receive more than was intended.
Here’s how it works: You become eligible for Social Security when you’re 62, but the longer you wait to begin receiving it, the bigger your check will be each month. The monthly check for someone who starts receiving benefits at age 70 can be 76 percent higher than if he had begun at 62. If a married couple files and suspends, it means that one of them files for his or her benefits at age 66 and immediately suspends receipt of those benefits. As a result, the spouse is now eligible to begin receiving a monthly spousal benefit (half of what the filing spouse’ check would have been), all while both of them continue to accrue larger benefits until they begin taking their maximum benefits at age 70. Executed properly, this strategy can result in an extra $50,000 in lifetime benefits for a married couple.
It seems likely that this provision to kill File and Suspend will stay in the budget bill, and it will become impossible for people to receive spousal benefits unless their spouse is receiving their main benefit. The big question is still, “When does it go into effect?” The original provision ended the strategy six months from now for everyone—including people who have already begun to implement the strategy. That didn’t sit very well with a lot of people who stood to see their monthly stipend reduced, so the provision has been amended to prevent anyone who plans to file and suspend after six months from now. That means that many retirees and pre-retirees will likely be scrambling to implement the strategy in the coming months.
At the time of this writing, the bill has already been passed by both the House and the Senate. There is no reason to think that President Obama will not sign it into law. Should anything happen that changes the impact of the bill on the File and Suspend strategy we will update accordingly.