In November of 2015, Congress passed a budget bill phasing out the Social Security claiming rules that previously allowed restricted applications and voluntary suspensions, known informally as the “file-and-suspend” option. In the past, these strategies have helped some retired spouses substantially increase the amount that they were able to receive from their Social Security benefits.
“It appears that the federal government perceived some of these strategies, like file-and-suspend and restricted applications, as loopholes that needed to be closed,” says Dave Giertz, president of Nationwide Financial Distributors at Nationwide Financial.
As the new rules go into effect, some retirees will still have the opportunity to take advantage of the old strategies and many more will be barred, largely depending on age. The shift presents an opportunity for financial advisors to work with clients to revisit their retirement and Social Security plans.
Here’s what advisors need to need to know to help their clients navigate the changes.
The rule changes
Restricted applications. In the past, restricted applications allowed eligible individuals to receive spousal benefits without filing for their own benefits first. An individual’s own benefit could continue to grow, and that individual could then switch to his or her own benefit once it hit its maximum.
As the new law is phased in, many individuals will no longer have this option. Rather, if an individual files for spousal benefits, the Social Security Administration will deem that she has filed for her own benefits as well. She will receive the larger of her own benefit or her spousal benefit at the time of her application.
The restricted application strategy will continue to be available to those who are already using it and those born on or before January 1, 1954. Individuals born January 2, 1954 or afterward will no longer have access to this strategy.
Changes to restricted applications do not apply to survivor benefits. Survivors will still have the option to restrict their benefits to widow/widower benefits or their own retirement benefits, as well as the ability to switch between the two.
Voluntary suspension, or file-and-suspend. Voluntary suspension allowed individuals to file for Social Security benefits and then suspend receiving those benefits—a strategy that married couples could use to increase the higher earning individual’s benefits while still allowing the spouse to receive benefits based on that income history. For instance, a man could claim his own benefits, then suspend them—allowing his monthly benefit amount to continue growing. His spouse could then file a restricted application, claiming spousal benefits based on his earnings.
Individuals can file and suspend their benefits before April 30, 2016. However, after that date, one spouse will no longer be able to make a claim on the other spouse’s suspended benefits. One exception to this rule: A divorced spouse making a claim on his or her former spouse’s income history will still be able to collect that benefit despite any current or future suspensions.
How advisors can respond
In light of these changes, advisors should take a look at their book of clients to identify those who were grandfathered in—and thus still allowed to use these strategies—and those who will need to look at alternatives.
Clients for whom these rules no longer apply may need to restructure their financial plans to be sure they can optimize their Social Security benefits. Even with the rule changes, advisors can identify strategies to add substantial income for clients’ retirement needs, according to Giertz. The Nationwide Social Security 360 Analyzer can help advisors run analyses based on clients’ retirement income needs and identify which strategies they can pursue instead.