Social Security Strategies

Daniel Mazzola, CPA, CFA
Published Date:
Feb 1, 2016

The Social Security Act, which was signed into law in 1935, was designed to provide adequate financial assistance to the elderly, the poor, the unemployed, the widowed, and fatherless children.  Although its original purpose was to help those in need, it nevertheless tied entitlement closely to contribution, paying benefits only to retired workers. In 1939, Congress relaxed the benefit-contribution relationship by adding spousal benefits: These supplemental payments were based on what the system could afford, as well as the implicit notion that married couples required more money than single retirees. The inequities it created - single workers and dual-earner couples reaped no advantages yet made equal, sometimes greater, contributions than single-worker couples - seemed a small matter at a time when the Social Security payroll tax was only 1% of the first $3000 of annual wages. 

Social Security has been changed many times in addition to this first amendment in 1939. For example, revisions in 1965 established the Medicare and Medicaid programs. In 1972, an annual cost-of-living-adjustment was added, and in 1983, the law was altered to characterize benefits as taxable income.  In 2000, The Senior Citizens’ Freedom to Work Act repealed the limitation on the amount of outside income that beneficiaries of Full Retirement Age (FRA) could earn without a reduction in benefits. It also allowed a person over the FRA but under age 70 could voluntarily suspend benefits and earn delayed credits (8% per annum) for any month he requested not to be paid.  

An amalgam of the supplemental spousal benefit and the intentional cessation of one’s own benefits led to the creation of two strategies designed to increase a married couple’s aggregate lifetime Social Security payouts. The first of these is known as “file and suspend”: the worker-beneficiary files for - but does not claim - retirement benefits, allowing the spouse to collect a spousal benefit, which are not available until the worker-beneficiary files. The worker-beneficiary then suspends his own benefits, allowing him to earn the 8% delayed credits until age 70. The second strategy, called “restricted filing,” enables a worker-beneficiary, whose spouse is already collecting a benefit based on her own employment history, to receive a spousal benefit while delaying his own.  

As an example of the file and suspend strategy, we will use a traditional married couple, Mr. and Mrs. Smith, in which the husband is employed and the wife stays home to maintain the household. Both have attained FRA. Mrs. Smith is allowed a spousal benefit that equals 50% of Mr. Smith’s benefit, even though she has no earnings history of her own. As Mr. Smith is still working, he has no need to collect his Social Security, but the couple would like to supplement his wage income. Mr. Smith therefore files for his own Social Security benefit - permitting Mrs. Smith to collect her spousal benefit - and then immediately suspends it. By doing so, he receives an annual delayed credit of 8% and, as an added blessing, locks in a higher survivor benefit, assuming he dies a few years afterward. 

To illustrate the “restricted filing” strategy, we return to the Smiths - only this time Mrs. Smith has her own employment history.  She wants to collect on her own record, but Mr. Smith does not. He can, however, file a restricted application to claim a spousal benefit while again postponing his own and receiving the delayed credit. Key points to consider with both approaches is that the party who either files and “suspends” his or her benefit or files a “restricted” application must be at FRA, and that a married couple is limited to one spousal benefit.

U.S. lawmakers seldom pass legislation curtailing benefits for its citizenry, as any candidate for office promoting a platform of fiscal restraint will die a quick death. It was somewhat surprising, then, that Congress made effective the Bipartisan Budget Act on Nov. 2, 2015, eliminating those two strategies, derisively termed “unintended loopholes,” in the signed bill. The AARP supported the changes, noting that it would affect only a small group of retirees.   This might be true, if only because the claiming rules are so complex and Social Security Administration workers, according to their operations manual, are not “at liberty to substitute their own judgment or opinion for rulings, regulations or the law.” Social Security has been described as the one product all Americans buy, yet none understand. 

Those already receiving spousal benefits or those who have filed and suspended are not affected by the new rules. For those fortunate enough to be 62 or older, there is still time to take action. Worker-beneficiaries who are already 66 or who turn 66 before April 30, 2016, can still file and suspend but must do so by that date, while the restricted filing strategy remains viable to those age 62 or older as of Dec. 21, 2015. Financial service professionals need to move quickly to ensure eligible clients take advantage of an opportunity to increase their collective Social Security payouts by possibly thousands of dollars.   

At a time when analysts and politicians of nearly all persuasions agree that the long-term health of the Social Security system calls for revisions like eliminating the claiming strategies noted, one might expect a proposal for a change in the spousal benefit itself. Yet there have been none - no doubt because they are perceived as having a negative impact on women. The payment of a non-contributory spousal benefit is not predicated on the presence of children or financial need, and the associated tax burden falls heavily on a portion of the work force that receives no benefit from it.  Spousal benefits reflect the mores and practical realities of another era. In recent decades, dramatic social, economic, and legal changes have affected the profile of the American family, both at home and at work. By failing to keep pace with the changing nature of American families, Social Security’s outdated benefit structure results in single workers and dual-earner couples subsidizing the benefits of wealthier single-worker couples, adding a sharply regressive element to the present system.  

Daniel G. Mazzola, CPA, CFADaniel G. Mazzola, CPA, CFA, is an investment advisory representative with American Portfolios Advisors Inc. He is a Chartered Financial Analyst, Certified Public Accountant and Certified Financial Planner. Mr. Mazzola is a member of the NYSSCPA Personal Financial Planning Committee. 

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