The end to file-and-suspend: Sorry about that

shutterstock_101159917In June, I wrote a column predicting that Congress eventually would do away with “file and suspend” and other Social Security claiming strategies that the Obama Administration had labeled as “aggressive.” I thought it would take years for lawmakers to act. But the end was closer than many of us thought.

The budget deal quickly moving through Congress would eliminate new file-and-suspend applications 180 days after the bill is signed into law, according to the Fiscal Times. That change could shave as much as $50,000 off the lifetime benefits of couples who were planning to use the strategy to maximize their benefits, according to Laurence Kotlikoff, co-author of the book “Get What’s Yours: The Secrets to Maxing Our Your Social Security.”

If you don’t know, file-and-suspend was created in 2000 as a way to encourage people to keep working. Before that time, primary earners had to apply for their own retirement benefits before their spouses could apply for spousal benefits. With file-and-suspend, primary earners could put off actually receiving their Social Security, allowing their checks to grow, while still allowing their partners to get spousal benefits.

Spousal benefits were created with low- or non-earning spouses in mind, but financial advisors soon discovered file-and-suspend was also a good way to maximize benefits for two high-earning spouses. One could collect “free money” in the form of a spousal benefit before switching to his or her own benefit when it maxed out at age 70.

The growing popularity of the strategy pretty much doomed it. Five years ago, the Center for Retirement Research has estimated that file-and-suspend could cost as much as $9.5 billion each year. The more advisors learned about it, and the more people like me wrote about it, the more strain we were putting on an already troubled system.

 

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