DO YOU QUALIFY TO USE THIS SOCIAL SECURITY LOOPHOLE?
SUMMARY
The Bipartisan Budget Act of 2015 closed a couple of loopholes in the Social Security claiming process. But if you were born on or before January 1, 1954, you may still be able to take advantage of one aggressive claiming strategy.
AN UNUSUAL STRATEGY
We encounter a lot of different financial situations while working with clients, and we help manage not just portfolios but also cash flow strategies. Recently, a new client came to us with a unique situation. He is thinking of retiring in early 2021, but would like to hold off taking Social Security in favor of letting his benefit grow until he turns 70 in October 2021.
Nonetheless, without a working income, cash flow is an issue prior to activating his Social Security benefits. So how are we able to enhance his cash flow before age 70?
For this client and certain other individuals born before 1954, one part of the solution is an aggressive Social Security claiming strategy.
AN OPPORTUNITY IN THE LEGISLATION
One of the advantages of waiting to claim your personal Social Security benefit is your ability to earn Delayed Retirement Credits (DRCs). Each year you wait to claim Social Security after your full retirement age (FRA), your benefit goes up 8%, prorated monthly.
Social Security was designed to provide for dependent family members when the worker became disabled, died, or retired. In other words, it was meant to fill a cash flow need when there was no longer income. Married individuals, therefore, can only file for spousal benefits if their spouse has filed for retirement benefits, too.
Over the course of several decades, however, changing legislation for Social Security opened a pathway for two loopholes. After discovering them, people developed what are called “aggressive claiming strategies” to take advantage of them. As we’re all aware, Social Security funding is already on rocky ground unless taxes are raised (knowing Washington, likely) or spending contracts (also knowing Washington, unlikely). As a way to slow the erosion and realign policy with Social Security’s original intent, Congress included in the Bipartisan Budget Act of 2015 new parameters to terminate these two aggressive claiming strategies.
While the loophole File and Suspend has officially ended, the second loophole, taking a Spousal Benefit Before Individual, is still possible for qualifying individuals.
LOOPHOLE 1: FILE AND SUSPEND
Several of our clients have mentioned the File and Suspend strategy to us, but at this point, it is no longer an available option. Until 2016, File and Suspend, also known as Voluntary Suspension of Benefits, had allowed married individuals to file for benefits and then suspend the payments. This accomplished two things: your spouse could draw a spousal benefit even if you weren’t taking your own, and your delayed benefit would continue to grow.
For example, let’s say two clients, Jack and Jill, both turned 66 in 2014. At that time, Jack, who has the larger Social Security benefit, files for Social Security but then suspends it, allowing his benefit to accrue delayed retirement credits up to age 70. But because he filed, the loophole allowed Jill to start taking a spousal benefit at that time, even though Jack himself isn’t receiving Social Security payments.
File and Suspend subverted the original intent of Social Security, allowing a spouse to take a benefit while the worker was still bringing in an income. While those who took advantage of the strategy before were grandfathered in, this loophole was officially closed on April 30, 2016, according to the Social Security Administration. If Jack were now to file and suspend his benefits, Jill’s spousal benefits would also be suspended. Workers who suspend benefits also don’t retroactively receive lump-sum benefits from the suspended period.
LOOPHOLE 2: SPOUSAL BENEFIT BEFORE INDIVIDUAL
The second loophole, while technically corrected, still provides a window of eligibility for individuals who were born on or before January 1, 1954. This strategy permits a worker to delay filing for his or her own benefits so they can keep growing, but the worker can still receive a spousal benefit.
The concept is perhaps best explained with an illustration. Let’s say Jack and Jill have both just turned 67 (born in 1953), but have only just become aware of the strategy. Jill is already taking her own Social Security benefit. Jack, who is still working and would like to wait until age 70 to maximize his benefit, files a restricted application to receive a spousal benefit, one-half of Jill’s benefit at her full retirement age. He can then receive a Social Security income—in some cases, this can amount to tens of thousands of dollars over time—while letting his own Social Security benefit grow. When he’s 70, he turns off the spousal benefits and activates his own. Of course, this strategy may not be ideal if Jack and Jill both planned to wait until age 70 to file for Social Security.
Understandably, this practice was also addressed by the Bipartisan Budget Act of 2015, as it, too, circumvented the original intent of the Social Security benefits program. The new bill created what is known as “deemed filing,” which means that when those who were born on or after January 2, 1954, file for spousal benefits, they are also deemed to be filing for their own Social Security benefits. Social Security will pay out the greater of the two amounts, but an individual cannot claim one and then later change to the other.
However, if you were born before January 2, 1954, you may still be entitled to file a restricted application for a spousal benefit. Your spouse must already be taking his or her own Social Security benefits. If you are divorced, you must have been divorced for two or more years, were married for more than ten, and have not remarried, in which case it doesn’t matter if your ex-spouse is taking benefits or not.
By using this strategy, a qualifying worker can take advantage of both the delayed retirement credits and a spousal benefit. At age 70, the worker would switch from the spousal benefit to his or her higher, maximized benefit. For those who need the extra income but don’t want to compromise their benefit growth, it could be an appropriate strategy.
A CASH FLOW WINDFALL
The new client I mentioned earlier was married for more than ten years but has been divorced for more than two, and he has since remained unmarried. He will turn 70 next October and would prefer to wait to take his Social Security benefits until they have maxed out on his birthday. Given his situation, he is eligible to submit a restricted application for spousal benefits off of his ex-wife’s earnings, even if she is not yet taking Social Security benefits.
Though it will only give him a little less than a year’s worth of spousal benefits, it’s still a worthwhile windfall for him. The spousal income he will receive will mitigate his cash flow burden and help ease his transition from working life to retirement.
THINK YOU QUALIFY?
Be sure to verify your eligibility with the Social Security Administration (SSA) and explain, if you do qualify, that you are not applying for your own benefits or fall under the “deemed filing” provision. There are reports, as well, that those who try to claim this way are initially denied, but this is largely due to SSA representative unfamiliarity with the strategy. You may need to ask to speak with a supervisor or technician to set up the claiming strategy properly. Once activated, you can collect spousal benefits while letting your own continue to grow.
While File and Suspend is no longer available as a strategy, taking a spousal benefit before claiming your own is still potentially an option for certain married or divorced individuals who were born on or before January 1, 1954. If you fit the criteria, you might qualify to take spousal benefits while letting your own Social Security benefit grow through delayed retirement credits.
Social Security claiming strategies are not always cut and dry. One of the services we offer at Day Hagan Private Wealth is a Social Security analysis. If you have questions or would like to review your options, please don’t hesitate to reach out.
Sincerely,
Natalie Brown, CFP®
Director of Client Services
Financial Advisor
Day Hagan Private Wealth
—Written 11.18.2020.
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