There are two Social Security strategies for couples that have generated a great deal of interest among financial planners in recent years: file and suspend and claim now, claim more later. While these strategies can generate greater lifetime benefits for recipients, what about the Social Security system? With the system being stressed by massive boomer retirements (some estimate 10,000 per day) and a trust fund projected to run out of funds sometime in the early 2030s, how great is the impact of these creative filing strategies? Before looking at this question, lets review the two strategies.
In file and suspend, the higher-wage earner files for benefits at age 66 in order to let the lower-wage-earner spouse start collecting spousal benefits. The higher-wage earner, however, immediately suspends his or her filing in order to accrue delayed retirement credits until age 70. This odd-sounding file-and-suspend strategy allows the lower-wage earner to collect one half of the higher-wage-earner benefits and lets the higher earner commence greatly enhanced benefits at age 70. This strategy primarily benefits couples where the higher-wage earner makes much more than the lower-wage earner. If their earnings histories are similar, there is little benefit to file and suspend.
In claim now, claim more later, the higher earner files a restricted Social Security claim for spousal benefits only, so that he or she can collect a spousal benefit based on the work history of the lower earner. Then, at 70, the higher-wage earner files for his or her own greatly enhanced benefit. This strategy provides an even greater benefit for the couples where earnings histories are similar, which is more often the case today.
The Social Security Administration funded research to look a range of issues, including the cost to the system of people using these planning strategies. This research was partially reported in an article that appeared in the Journal of Financial Planning in August 2013. The research found that the cost of the file and suspend strategy to the Social Security system is very small, only about $0.5 billion per year. For perspective, in 2012 the Social Security Administration paid out $645 billion in retirement benefits and the Social Security Trust Fund had over $2.8 trillion in savings at the end of 2013, according to the Social Security Administrations website.
This relatively small system cost of file and suspend may be attributed to two primary factors. File and suspend, for all the attention that it has garnered, provides only modestly enhanced benefits, less than $2,000 gains in lifetime benefits for a typical couple. Secondly, the strategy only benefits a small percentage (27%) of current couples, those where the higher-wage earners earnings were far greater than that of the lower-wage earner. The cost of this strategy to the Social Security Administration would have been greater for an earlier generation of Americans when many women did not work or had very low lifetime earnings.
The research found that the claim now, claim more later strategy could benefit many more couples, with a higher cost to the Social Security Administration of approximately $23.3 billion per year if all couples fully optimize their file strategies. Fortunately for the Social Security system, but not the average couples, most couples do not optimize their strategies and leave significant money on the table. Based on real-life reported behavior, its estimated that the real cost to the Social Security Administration would be closer to only $9.7 billion per year. I would expect that with greater public awareness of these strategies and more educated financial planners this number should increase in the coming years but only time will tell.
With total income for Social Security Retirement and Survivors programs of $731 billion in 2012, the cost of these claiming strategies seems modest yet Congress will eventually be forced to look for ways to balance future balance sheets as the Trust Fund gets spent down. These juicy strategies could be on the chopping block but, for now, they may provide some real benefits to your clients.
Paul Norr is a financial planner in Thousand Oaks, Calif., and writes about planning and retirement. His website is www.paulnorr.com.
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