Editor’s Note: The Bipartisan Budget Act of 2015 includes a number of changes to Social Security rules. Here on Making Sen$e, columnist Larry Kotlikoff has repeatedly criticized the recent budget legislation for eliminating a number of claiming strategies.
But others, like Alicia H. Munnell, see these changes as good policy. Below, the director of the Center for Retirement Research at Boston College argues that the problem with these loopholes is that they run counter to the intent of the Social Security program and cost money. Social Security, she writes, is not supposed to be a complicated program where those “in the know” get a better deal than anyone else.
We’ll continue publishing updates on what this new law means for your Social Security benefits. Stay tuned.
— Kristen Doerer, Making Sen$e Editor
In a recent PBS NewsHour column, Larry Kotlikoff, while railing against provisions in the Bipartisan Budget Act of 2015 that closed loopholes in Social Security claiming strategies, noted that I supported the changes. Let me explain why these changes represent good public policy. The two loopholes can be described as “file and suspend” and “spouse then worker.”
The “file and suspend” strategy allows for a worker who reaches the full retirement age to file for and immediately suspend his or her benefits, while still allowing the spouse to receive a spousal benefit based on the worker’s earnings record. The worker is then free to continue working and receive delayed retirement credits, which increases not only his or her monthly benefit but also the spouse’s survivor’s benefit. This strategy emerged in the wake of the Senior Citizens Freedom to Work Act of 2000, which first allowed the “voluntary suspension” of benefits. The goal was to allow people who decided that they had made a mistake by claiming early to stop their payments and earn delayed retirement credits. It was not designed to allow couples to maximize their retirement income.
The “spouse then worker” strategy allows a worker with relatively high earnings to begin claiming a benefit as a spouse for several years, as if he or she were economically dependent, while building up delayed retirement credits towards his or her own worker’s benefit later. This outcome was possible, because “deeming” — whereby the Social Security Administration assumes that the individual is claiming both types of benefits, compares the worker and spousal benefits and awards the highest — does not apply after the full retirement age. Deeming, which was introduced in 1956, did not apply after the full Retirement age, because the program did not offer delayed retirement credits at that time, so workers had no incentive to postpone claiming.
The problem with these loopholes is that they run counter to the intent of the Social Security program and cost money. Social Security is designed to replace income lost when a worker retires, becomes disabled or dies. To achieve income adequacy goals, Congress provided a spouse’s benefit to supplement retirement income for one-earner couples. The spouse’s benefit was not intended as a bonus for high-income couples that could game the system to their advantage. Moreover, benefits were intended to be actuarially fair regardless of when they were claimed, but individuals who claim a lower spousal benefit while simultaneously earning delayed retirement credits come out ahead.
Most of the controversy surrounding the elimination of these claiming strategies has centered on the effective date. As originally enacted, the legislation would have terminated “file and suspend” midstream for some already engaged in the strategy. Under the final version, the new rules will kick in six months from the signing of the legislation (Nov. 2, 2015) and grandfather in anyone currently going through the process. In contrast, the grandfathering period for “spouse then worker” is much longer; the new rules will not apply to anyone 62 and older in 2015.
Eliminating these strategies is a very positive development. Social Security — the backbone of our retirement system — is not supposed to be a complicated program where those “in the know” get a much better deal than the average guy. Now the rules are clear, and people will get their intended benefit. The program will also save some money.
Now let’s fix the system’s 75-year financing shortfall!