High-Income Social Security Filers May Lose $50K In Budget Deal

By Cyril Tuohy

Higher earners stand to lose up to $50,000 in Social Security benefits in a budget that President Barack Obama is expected to approve.

The budget eliminates a strategy known as file-and-suspend, which is used by a relatively small percentage of clients. Most Social Security recipients elect not to wait until full retirement age of 66 to collect their benefits.

Only 11 percent of new Social Security retirement beneficiaries delay collecting the benefit past their full retirement age, said Wade Pfau, a professor in the Retirement Income Program at The American College of Financial Services in Bryn Mawr, Pa.

“It will affect more sophisticated individuals working with advisors, so it’s a relatively small percentage of the public delaying Social Security,” Pfau said in an interview with InsuranceNewsNet. The budget appears to usher in some of the biggest changes in the entitlement program in the past 15 years, Pfau said.

Estimates say millions of Americans who plan to claim Social Security but have not already done so would be affected. Retirees stand to part with as much as $9.5 billion in Social Security benefits that they might otherwise have taken advantage.

For higher earners, there’s no question that eliminating the file-and-suspend strategy could add up to as much as $50,000 in lost income, or the equivalent of four years of a spousal benefits, said Pfau, an expert on retirement income planning.

As a result, some higher earners claiming spousal benefits while their spouses delay their own benefit, might experience a $10,000 a year hole on the income side of the household budget, he added.

Advisors should consider advising clients to file and suspend within the next six months, said Marc Kiner, president of Premier Social Security Solutions LLC.

Filing within six months will also give an opportunity for spouses to eventually file a restricted application down the road.

“I can foresee a lot of activity for in the next six months,” Kiner said. “I can also see the window move to 12 months because I can’t see how Social Security updates computer systems to do it within six months."

Just to be clear: eliminating the benefit doesn’t overturn the general argument that the longer retirees delay taking Social Security the higher the payout. Social Security can be taken as early as 62.

Killing file-and-suspend and the so-called restricted claim for spousal benefits simply “eliminates the possibility of extra benefits that the public doesn’t know about,” Pfau said.

Ironically, it may be the cottage industry of consultants and Social Security experts who have cropped up over the past few years who might suffer the most. Those experts make a living off seminars advising financial advisors on how to maximize Social Security withdrawal benefits.

The House voted 222-167 Wednesday to kill some existing Social Security claiming strategies as part of a deal to raise the debt ceiling, keep the government running for the next two years and close the loopholes in entitlement programs.

The Obama administration had called for closing the loopholes and powerful groups including AARP agreed.

The bill, which would affect people who turn 62 in 2016 or later and would go into effect six months from now, is under review in the Senate.

So far as advisors are concerned, there’s no immediate scramble to man the phones and call clients unless a Senate committee decides to change key elements affecting the claiming strategy contained in Section 831 of the Bipartisan Budget Act of 2015, Pfau said.

Section 831 closes loopholes in Social Security’s rules about “deemed filings, dual entitlement, and benefit suspension in order to prevent individuals from obtaining larger benefits than Congress intended,” the bill reads.

Critics of a file-and-suspend approach say it amounts to double-dipping.

Under the file-and-suspend strategy, married filers who file for benefits but opt to suspend their Social Security checks get the spousal benefit — accessing benefits early — while delaying their own benefits by waiting until age 70 to file.

In some cases, the benefit amounted to as much as 50 percent of the suspender spouse’s full Social Security retirement benefit.

Under a restricted application strategy, also known as the “claim some now; claim some later,” a worker files only for spousal benefits even if his or her own benefits would be higher. This allows the worker to wait until age 70 to draw his or her own benefits and receive delayed retirement credits.

File and suspend was allowed under the Senior Citizens’ Freedom to Work Act signed into law in 2000 as a way to encourage older Americans to remain in the workforce.

In time, with more people filing for Social Security benefits, former Social Security managers and experts discovered the loophole and began selling their expertise to advisors looking for ways to maximize their clients’ Social Security withdrawal benefits.

A coordinated Social Security withdrawal approach can boost Social Security income by as much as 32 percent, according to consultants Jim Blair and Marc Kiner with Premier Social Security Consulting LLC in Cincinnati.

That’s a much more effective way to manage Social Security income than relying on cost-of-living adjustment (COLA) the Social Security Administration (SSA) grants.

SSA has announced there will be no cost-of-living increase in 2016 because inflation remains low.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].