Social Security changes affect retirement planning

The latest federal budget law restricts the use of the file-and-suspend and lump-sum options.
By Alistair M. Nevius

Recent changes to Social Security contained in the Bipartisan Budget Act of 2015, P.L. 114-74, signed by President Barack Obama on Nov. 2, 2015, will restrict planning opportunities for many people as they approach retirement age.

The early Baby Boomers, those born from 1946 to 1953, will be allowed for the most part to take advantage of planning opportunities that have existed since the Senior Citizens' Freedom to Work Act of 2000, P.L. 106-182. The younger cohort of the Boomer generation, those born from 1954 to 1964, and all subsequent generations, will be unable to use the planning strategies that have afforded couples some extra money in their Social Security checks. The rationale used to eliminate these planning strategies was that only the top two quintiles (40%) of earners were taking advantage of them, which meant to Congress that only the well-to-do were benefiting.


A spouse and/or qualifying child is allowed to receive a Social Security benefit on the work record of the other spouse only when the other spouse files for his or her own Social Security benefits. The file-and-suspend strategy allows a worker to file for purposes of allowing his or her spouse and qualifying children to begin collecting Social Security benefits on his or her work record, but the same worker defers collecting his or her own benefit until a later age, accruing an 8% per year added benefit through age 70. File and suspend, as just described, will still be allowed for anyone who is age 66 or older by April 29, 2016—180 days after the bill was signed into law on Nov. 2, 2015.

File and suspend is still part of Social Security, but it is limited to the worker only, for those 66 and younger after that date. After that, the file-and-suspend strategy will allow a worker who had started receiving benefits to suspend those benefits to accrue delayed retirement credits from that point until the worker begins benefits again, up to age 70. Suspending benefits for a worker will now suspend benefits for everyone involved, not just the worker. A spouse and/or qualifying children will be allowed to collect a Social Security benefit on a worker's record only when that worker himself or herself is actually receiving benefits.


Another change affects the ability to file a restricted application for a spousal benefit only. Previously, a married person at full retirement age (age 66 for workers currently eligible to file for their benefits) was allowed to file a restricted application with Social Security for a spousal benefit only. This allowed the married person to collect one-half of his or her spouse's benefit and defer the collection of his or her own benefit to a later date, up to age 70, accruing the 8% per year in delayed retirement credits on his or her own benefit. People who were 62 by the end of 2015 (those born in 1953 or earlier) are still allowed to file a restricted application. People born in 1954 and later will not be allowed to file for only a spousal benefit at full retirement age.

The act also restricts another common Social Security planning opportunity, the lump-sum option under which a person would file and suspend at full retirement age and before age 70 ask for the suspension to be stopped. The person would then collect a lump-sum payment for all of the monthly benefits suspended since full retirement age (again, currently age 66) and start getting a monthly check as if he or she had started benefits at full retirement age. The lump-sum option is no longer available for anyone who is not age 66 or older by April 29, 2016.

The act also took $150 billion from the Social Security side of the trust fund and moved it to the disability side, shoring up the disability side through 2022, but it failed to mention how much sooner the regular Social Security side of the trust fund will run out of money as a result of this transfer.

For a detailed discussion of the issues in this area, see "Personal Financial Planning: Social Security: The Hidden Changes in the Two-Year Budget Bill," by Theodore J. Sarenski, CPA/PFS, in the March 2016 issue of The Tax Adviser.

Alistair M. Nevius, editor-in-chief,The Tax Adviser

Editor's note: After the publication of this item, the Social Security Administration clarified that the last date for filing for suspension of benefits under the old rule is April 29, 2016.  

The Tax Adviser is the AICPA's monthly journal of tax planning, trends, and techniques.

Also in the March issue:

  • A review of recent developments affecting individuals.
  • A look at planning opportunities with Roth IRAs.
  • A discussion of business development during tax season.

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