Edward A. Zurndorfer
As more and more of the “baby boomers” retire, the decision of when to start receiving their Social Security retirement benefits, and on whose benefits (their own, a current spouse’s, or a former spouse’s) they will apply for, will need to be addressed. This column discusses various claiming strategies for individuals to receive and to hopefully maximize their lifetime Social Security retirement benefits. These strategies include the “do-over”, “file and suspend”, and “restricting an application” (also known as “claim now, claim more later”) options.
As a review, an individual is eligible to collect a Social Security retirement check when the individual is “fully insured” (that is, individual has earned at least 40 credits of Social Security). This retirement check may be collected as early as the first full month after the month the individual becomes age 62. But if the individual starts collecting starting when he or she is age 62, the retirement benefit will be permanently reduced. The earliest age an individual can collect a full Social Security retirement benefit is his or her full retirement age (FRA). FRA depends on what year an individual was born. The following table summarizes FRA by year of birth and the portion of the full retirement benefit (claimed starting the month an individual reaches FRA) that an individual will receive if the benefit is claimed starting the first full month after the individual becomes age 62:
Full Retirement Age (FRA) by Year of Birth and Percentage Amount of Full Retirement Benefit Payable at Age 62*
|Year of Birth||Full Retirement Age||Amount Payable at Age 62|
|1937 or earlier||65||.800|
|1938||65 & 2 mos.||.792|
|1939||65 & 4 mos.||.783|
|1940||65 & 6 mos.||.775|
|1941||65 & 8 mos.||.767|
|1942||65 & 10 mos.||.758|
|1943 – 1954||66||.750|
|1955||66 & 2 mos.||.742|
|1956||66 & 4 mos.||.733|
|1957||66 & 6 mos.||.725|
|1958||66 & 8 mos.||.717|
|1959||66 & 10 mos.||.708|
Until December 2010, the “do over” strategy allowed individuals to collect reduced Social Security retirement benefits starting as early as age 62 and, at any point up to age 70, “withdraw” their application for benefits, thereby stopping their monthly Social Security retirement benefit. Recipients could then repay all of their accumulated monthly benefits they had received to that point (without penalty and interest), and then at any time restart their benefits at a higher rate, as if they have never collected the reduced retirement benefit amount at an earlier age. The following example illustrates:
Frank was born Feb. 1, 1943. His FRA is age 66. In early 2005, when was age 62, Frank made the decision to receive his Social Security monthly retirement benefit. His monthly benefit was reduced by 25 percent as a result of starting his Social Security monthly retirement benefit at age 62. By the time Frank reached his FRA in 2009, he had collected a total of $100,000 in Social Security retirement benefits. But in early 2009 after selling his principal residence for a profit, Frank repaid to the Social Security Administration the entire $100,000 in total Social Security benefits he had received to-date. As a result, Frank’s Social Security benefits were increased by 25 percent when he restarted his monthly benefit in late 2009.
Although these repayments often exceeded over $100,000, before 2010 repaying the Social Security Administration was significantly cheaper than buying an immediate annuity from an insurance company that would generate the same amount of guaranteed income. The “do over” strategy essentially amounted to an “interest-free” loan from the Social Security Administration.
But effective Dec. 1, 2010, the Social Security Administration stopped the “do-over” option. Under new Social Security Administration regulations that took effect in December 2010, an individual can stop and repay previously received monthly benefits only once in a lifetime, and it must be within 12 months of first claiming benefits. If an individual changes their mind 12 months or later after they initially started their benefits, then they cannot take advantage of the “do over” strategy (that is, withdrawing their initial application and then reapplying for benefits).
The question then becomes: Are those individuals who started collecting Social Security retirement benefits starting after 2010 (before they reached their FRA) and have collected these benefits for more than 12 months out of luck with respect to the “do over” strategy? The answer: Not necessarily.
There is a lesser known Social Security filing option that allows individuals who have reached their FRA to voluntarily suspend – but not repay- the Social Security benefits they are receiving. Besides suspending their own benefits, the suspension of benefits includes any family benefits (benefits paid to a spouse or children younger than age 18) received based on their earnings records. The suspended benefits will then earn “delayed retirement credits” equal to eight percent per year for each year they postpone collecting their benefits until age 70. Consider the following example:
Jean, who was born on January 2, 1954, is entitled to a Social Security retirement monthly benefit of $1,600 at her FRA of 66 years. Jean started receiving her benefit in February 2016 at a reduced (25 percent) amount of $1,200. In January 2020, Jean contacts the Social Security Administration to suspend her monthly benefit payment. Putting aside any cost-of-living adjustments (COLAs) between ages 66 and 70, Jean’s monthly benefit will increase eight percent (delayed retirement credits) for each year Jean does not receive a benefit until age 70. If Jean decides to reapply for her monthly benefit at age 70, her benefit will increase by 32 percent (four years times eight percent per year), boosting the benefit to 99 percent of what the benefit would have been if she had started collecting these benefits at her FRA.
Here is how the math works: 75 percent (reduced benefits at age 62) times 132 percent (delayed retirement credits from age 66 years through 70) equals 99 percent. For Jean, this means a monthly benefit at age 70 of $1,584 (132 percent times $1,200). Had Jean started collecting her benefit at age 66, her monthly benefit would have been $1,600.
$1,584/$1,600 = .99
Additional Considerations Before “Withdrawing” An Application Within the First 12 Months
Before making a decision to “withdraw” an application within the first 12 months of initially receiving benefits, there are some things individuals need to know about what will happen if they withdraw their application, including:
- An individual who “withdraws” an application must repay all the Social Security retirement benefits based on their retirement application. The repayment also includes any benefits a spouse, a dependent parent or children received based on the individual’s Social Security retirement benefit. Anyone who received benefits based on the individual’s benefits must also consent – in writing – to the “withdrawal” of application.
- Money withheld from the Social Security retirement checks must be repaid. Money withheld includes: (1) Medicare Part B and Part D premiums (for individuals age 65 and older); (2) Voluntary federal income tax withholding for all years prior to the current year; and (3) Garnishments.
- Those individuals who are already entitled to Medicare benefits may also choose to withdraw their Medicare coverage, but they do not have to.
How to “Withdraw” An Application
For those individuals who are within the first 12 months of receiving their Social Security monthly retirement benefits, they can withdraw their application by filling out and submitting Social Security Form SSA-521 (Request for Withdrawal of Application) (downloadable here). Included on Form SSA-521 must be a reason for withdrawing the application. Once the Social Security Administration receives Form SSA-521, they will then notify the applicant as far as how much in total benefits that needs to be repaid.
How to “Suspend” Social Security Retirement Benefits
For those Social Security benefit recipients who are too late (more than one year has passed since they first started receiving their Social Security monthly retirement check) for “withdrawing” their application, they can suspend their benefits once they reach FRA. They may do so by simply contacting the Social Security Administration at 1-800-772-1213 and state that they want to suspend their benefits. Note that a suspension of benefits cannot occur until the recipient has reached FRA. They can restate their monthly benefits at any time thereafter by contacting the Social Security Administration.
The “File and Suspend” and “Restricting an Application” Filing Options
Under Social Security’s “dual entitlement” law, a married individual is entitled to the higher of: (1) the Social Security retirement benefit based on his or her own earnings history; or (2) a spousal benefit equal to 50 percent of his or her spouse’s or a former spouse’s Social Security retirement benefit. Married individuals who file for retirement benefits before their full retirement age (FRA) (age 65 to 67, depending on what year an individual was born) based either on their own earnings record or on spousal benefits, are “deemed to have filed” for both benefits at the same time. But once a married individual reaches his or her FRA, some individuals (under a new rule that took effect in late 2015 – see below) can “restrict an application” to one type of benefit, allowing the individual to apply for one type of benefit at his or her FRA and apply for the higher Social Security retirement benefit at a later time.
These two filing options give rise to two planning strategies that are beneficial to married and to divorced individuals. In short, these strategies enable married and divorced individuals in certain situations to possibly maximize their lifetime combined Social Security retirement benefits.
But the Bipartisan Budget Act of 2015 (enacted on November 2, 2015) amended Social Security provisions related to “deemed filing” and “benefit suspensions”, in order to prevent individuals from obtaining larger Social Security retirement benefits than Congress intended. The result is that most individuals no longer are able take advantage of “file and suspend” and of “restricting an application” (also known as “claim now, claim more later”) strategies. However, because of the effective dates and the grandfather provisions of this law, some married couples were able to take advantage of the “file and suspend” strategy before these opportunities ended. Also, depending on when an individual was born, the individual may still be able to “restrict an application”.
End of “File and Suspend”
Under rules which remained in effect until April 30, 2016, a “fully insured” individual (someone who had at least 40 credits of Social Security) upon reaching FRA could file for his or her Social Security retirement benefit and then immediately suspend the benefit (that is, after receiving the first monthly retirement check, contact the Social Security Administration to suspend payments and return the first monthly payment). Since the individual had formally filed for benefits, the individual’s spouse was permitted to request a spousal benefit assuming the spouse was: (1) at least age 62; and (2) if the spouse was younger than his or her FRA, the spouse’s own Social Security benefit at his or her FRA was less than half of the other (higher earning) spouse’s Social Security benefit at FRA. Furthermore, since the benefits of the higher earning spouse were suspended, the higher earning spouse earned delayed retirement credits (DRCs) of 8 percent per year until age 70. The DRCs amount potentially to a maximum 32 percent increase in benefits for higher earning spouses whose FRA is age 66 (those born between Jan. 2, 1943 and Jan. 2, 1955).
Under the Bipartisan Budget Act of 2015, effective May 1, 2016 if an individual suspends benefits, then all benefits associated with that individual’s Social Security earnings are suspended. These benefits include individual, spousal, and dependent children benefits. The new law effectively ended the” file and suspend” strategy. Most importantly, it eliminates a means of potentially maximizing benefits for married couples, especially those couples who were born in the same year and who both have contributed to Social Security most of their working years. However, because of the effective dates and the “grandfather” provisions of the new law, some married couples may still be able to take advantage of the “file and suspend” provision.
In particular, under the following conditions a married couple could take advantage of “file and suspend” option: (1) the “higher earning” spouse, the one who is filing and suspending, must have been at least age 66 as of April 30, 2016 (born April 30, 1950 or earlier); and (2) the “lower earning” spouse must have been born before Jan. 2, 1954.
Also, the “file and suspend” option must have been elected before April 30, 2016. The following example illustrates:
Howard reached his FRA in January 2016 but plans to continue working until age 70. His retirement benefit at FRA was $2,200 per month in January 2016. At that time, his wife Alice was age 62, is no longer working and would have received $900 a month at her FRA of 66. If she began taking her Social Security benefit at age 62, the benefit based on her earnings record would have been $900 times 75 percent or $675, while her spousal benefit amount would have been $2,200 times 50 percent times 70 percent (there is a 30 percent or $330 reduction in the spousal benefit because Alice was starting to receive her spousal benefit before her FRA) or $770.
But Alice could claim a spousal benefit only if Howard has claimed his benefits. Therefore, Howard “files and suspends” which enabled Alice to draw a spousal benefit which is greater than the benefit based on her own earnings record. In the meantime, Howard waits until age 70 to begin receiving benefits which enables him to receive delayed retirement credits so that his monthly benefit, beginning at age 70, is $2,904 (8 percent of $2,200 equals $176; four(years) times $176 is $704, added to $2,200 equals $2,904).
This is what happened in January 2016 in which Howard “filed and suspended”. But now four years later, Howard is 70 years old. Sometime earlier in 2020, he claimed his Social Security benefit equal to $2,904 per month (see above) (plus any cost-of-living adjustments between 2017 and 2020). His wife Alice is now eligible to receive the enhanced spousal benefit of $2,904 times 50 percent less $330, or $1,122 per month.
When an individual claims individual Social Security retirement benefits, an additional payment of 50 percent of his or her primary insurance amount (PIA) (the amount payable each month at his or her FRA) also goes to each dependent child in the household. Children include biological and legally adopted children, provided the child is unmarried and under the age of 18. The rules also apply to disabled children with no upper age limit, provided the disability occurred before the age of 22. An “early“ (pre-age 62) spousal benefit (“father” or “mother” benefit) is also available to a spouse under the age of 62 if the spouse is a parent caring for a disabled child of any age, or for a young child under the age of 16. These payments collectively are subject to a maximum family benefit which varies between 150 and 180 percent of the primary worker’s PIA.
Given that spousal, dependent and disabled children benefits will occur only upon an individual’s filing for his or her own benefits, the claiming of spousal and dependent child benefits was also a benefit from the “file and suspend” rules.This means an individual upon reaching his or her FRA could “file and suspend” at FRA to activate not only a spousal benefit, but dependent and disabled child benefits while delaying his or her own Social Security retirement benefits to age 70 in order to earn delayed retirement credits. But with the new law, only those individuals born before April 30, 1950 and who elect to actually “file and suspend” before April 30, 2016 could have taken advantage of this option.
As mentioned above for the spousal benefit, those individuals who were eligible for and took advantage of the “file and suspend” option before April 30, 2016 and used the option for dependent children or a disabled child, as of May 1, 2020 all of these individuals have reached their 70th birthdays. They should have already elected to receive their (enhanced) Social Security benefits. This means that if their dependent children or disabled children are still eligible to receive these “children” benefits, the children benefit will also be enhanced upon the parent applying for the benefit.
For those individuals born after April 30, 1950 and who want their spouses and children to receive Social Security benefits based on their PIA, the options are to either immediately receive their benefits – even before FRA at a reduced rate – or to delay them resulting in a larger starting benefit for the individual and for a spouse and children..
Grandfathering of “Restricting an Application” (Also Known As “Claim Now, Claim More Later”)
Unlike “file and suspend”, the purpose of a “restricting an application” is for the filer to receive his or her spousal (or former spouse, if married for at least 10 years and divorced for at least two years) benefit while simultaneously delaying his or her individual retirement benefit. When a claim for benefits is filed, the individual filer is “deemed to have filed” for both individual and spousal benefits. Under current Social Security rules per the Bipartisan Budget Act of 2015, an individual must be at least FRA and born before January 2, 1954 in order to “restrict an application”. Upon “restricting an application”, the individual filer delays his or her Social Security benefits past FRA to as late as age 70 (earning delayed retirement credits) while the filer’s spouse claims benefits starting as early as age 62. The spouse delaying benefits files a “restricted application” only if he or she has reached FRA, claiming a spousal benefit. This is true even if the filer’s Social Security benefit at FRA is more than half of the spouse’s or former’s Social Security benefit.
The filer starts receiving half of the spouse’s or former spouse’s Social Security benefit. In the meantime, his or her own benefits earns delayed retirement credits of 8 percent per year until he or she reaches age 70. At that time, the individual applies for and switches from a spousal benefit to the benefit based on his or her Social Security earnings record, increasing his or her benefits by as much as 32 percent. This strategy could maximize the couple’s lifetime benefits, particularly when each is in good health and has a longer than normal life expectancy.
Under the new law taking effect May 1, 2016, an individual who applies for a spousal benefit is automatically “deemed” to have also applied for his or her own retirement benefit. Therefore, a restricted application for only one type of benefit is no longer allowed for individuals born after January 1, 1954. It will no longer be possible to apply for just one benefit and then switch to another benefit later. In short, either the individual or the spousal benefit starts earlier, or both are delayed until later, at which time the claimant simply receives whichever benefit is higher. This new rule prevents married couples from taking advantage of “restricting an application” (also known as “claim now, claim more later” strategy) that has been used in the past.
Note that the end of the “restricting a Social Security application” applies only to individuals born after Jan. 1, 1954. Any individual 62 or older during 2015 (born before January 2, 1954) can still file a “restricted application” under the current rules. This means that if an individual is already receiving a spousal benefit under the “restricted application”, then the individual may continue to do so. It also means that if an individual is not receiving a spousal benefit yet but had planned to file a “restricted application” for it in the future, the individual can still do so if the individual was born before Jan 2, 1954.
There is, however, an additional caveat to “restricting an application”. In order for the one eligible spouse to file a “restricted application”, the other spouse has to receiving his or own Social Security benefit. If the other spouse decides not to receive their Social Security benefit, then the other spouse cannot draw on half of the other spouse’s Social Security benefit. As explained below, this is not the case with respect to “restricting an application on a former (divorced) spouse’s Social Security benefit.
Social Security Benefit Claiming Options for Divorcees Under the Bipartisan Budget Act of 2015
The “do-over” option was never available to a former spouse who is receiving half of an ex-spouse’s Social Security retirement benefit. The same is currently true with respecting to a former spouse “withdrawing” or “suspending” half of an ex-spouse’s Social Security benefit. The benefit will not be increased through delayed retirement credits upon the former spouse requesting a restart of the benefit.
With respect to divorced spouses, “file and suspend” is not relevant because before April 30, 2016, a divorced spouse upon reaching his or her FRA was always eligible for 50 percent of the ex-spouse’s Social Security (provided they were married for at least 10 years, been divorced for at least two years, and his or her ex-spouse is at least age 62) regardless of whether the ex-spouse had filed for his or her Social Security benefits.
A divorced spouse is eligible for filing a “restricted application” in order to obtain the ex-spouse’s benefits while delaying the divorced spouse’s own retirement benefits provided: (1) The divorced spouse was born before January 2, 1954; (2) The divorced spouse and ex-spouse were married for at least 10 years and have been divorced for at least two years; (3) The ex-spouse files the restricted application at his or her FRA or later.
Note that the “restricted application” strategy remains available under the law for individuals born before Jan. 2, 1954. For divorcees born after Jan. 1, 1954, they must either claim the higher of their retirement benefit or half of the ex-spouse’s retirement benefits, or delay filing for their benefit in order to receive a higher amount of their retirement benefit. Either way, a divorcee born after Jan. 1, 1954 only gets the higher of either benefit – his or her own or half of his or her ex-spouse’s – and not both cumulatively.
Interestingly, the new law could make it advantageous for divorced couples to remarry, especially couples in which the spouses were born in the same year and both have contributed substantially to Social Security throughout their working careers. Suppose there are two formerly married individuals, both of whom have reached their FRA of 66, were married for 32 years, and have been divorced for at least two years. Since each former spouse has reached FRA and because the couple has been divorced for at least two years, each former spouse can collect a full spousal benefit (half of the other spouse’s Social Security) while delaying the receipt of his or her own Social Security benefit. This delay results in delayed retirement credits of 8 percent per year. When they turn age 70, they remarry and switch to their own Social Security retirement benefit, which has increased by 32 percent. For high-earning couples, this strategy could result in as much as $100,000 in additional lifetime Social Security benefits.
Effect of New Rules Under the Bipartisan Budget Act of 2015 on Survivor Benefits
The new law has no effect on survivor benefits. For that reason, the rules regarding survivor benefits for married couples and divorced couples are reviewed here.
When one spouse of a married couple passes away, the surviving spouse is eligible for a survivor benefit, also known as a widow or a widower benefit starting as early as age 60 provided the widow/widower does not remarry before age 60. It is equal to 100 percent of the deceased spouse’s benefit. This rule also applies to a divorcee whose former spouse has died, provided the couple was married for at least 10 years and the divorcee remains unmarried until age 60.
A surviving spouse or ex-spouse who has not remarried until at least age 60 has the choice of selecting the higher of the widow/widower benefit or his or her own retirement benefit and not the cumulative total of both.
But surviving spouses/ex-spouses still have a choice concerning when to claim each – the widow/widower benefit, or his or her own individual retirement benefit – and the new law does not change these rules.
As a result, a surviving spouse/ex-spouse still has the option of choosing whether to begin widow/widower benefits as early as age 60 or as late as 70, and also can choose whether to start his or her own retirement benefits as early as age 62 or as late as age 70.
Note that whether a surviving spouse/ex-spouse starts receiving either a widow/widower benefit or his or her own retirement benefit before their FRA, starting any Social Security before FRA results in a reduced benefit. By electing a widow/widower benefit instead of his or her retirement benefit (and delaying the retirement benefit past FRA) the result will be an increased retirement benefit (through delayed retirement credits that are imposed on the surviving spouse’s own retirement benefit) that could result in an increase in monthly Social Security benefits as much as 32 percent higher. However, a widow/widower benefit is not eligible for delayed retirement credits.
Social Security for Federal Employees
The profiles are hypothetical and are not intended as investment advice. Please consult with your financial advisor if you have questions about these examples and how they relate to your own financial situation.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.