Get the Facts on "File and Suspend"

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By now most advisors have at least heard of the “file and suspend” strategy for couples to maximize their Social Security benefits. If only all the good folks working in Social Security’s offices were familiar with it, this couple would have had a much easier time. Throw in a federal pension and what used to be an easy decision can become very complex.

When John and Susan became clients of our firm, we told them early on about the Social Security claiming strategy for couples, commonly called “file and suspend,” to delay claiming Social Security in order to collect the higher benefit available at age 70. For every year benefits are delayed from the Full Retirement Age (FRA) to age 70, the benefit increases by 8% plus any cost of living increases. For older folks whose FRA is age 65, this represents a potential 40% increase in benefits by delaying for the full five years until age 70. For John and Susan, it represents a 32% increase from their FRA of 66 to age 70.

Claiming a Spousal Benefit

There is a lot of confusion out there as to how spousal retirement benefits actually work. In order for a wife to claim a spousal retirement benefit on her husband’s record, he would have to have filed for his benefit. If so, then her benefit would be half of his Primary Insurance Amount, which is the full, unreduced benefit at his FRA. (Note that it is not half of the benefit he is actually receiving. If he is older and receiving a larger benefit because he delayed claiming benefits past his FRA, her benefit is still calculated on his PIA, not his actual benefit.)

If she has reached her own FRA, then she receives her full half share. There is no increase in her half share for delaying past her FRA. If she has reached age 62, but not her FRA, then she will receive her half share of her spouse’s benefit (reduced for claiming before FRA) or her own benefit (also reduced), whichever is greater. The implication here is that if you are going to claim a spousal benefit, there is no advantage to waiting beyond your FRA.

What often gets lost in the details is a wife’s ability to claim a spousal benefit on her husband’s record at her FRA, while delaying her own benefit, then switch from the spousal benefit to her own, increased benefit anytime before age 70. There is no advantage to waiting past her age 70 to switch, since her benefit will not increase any more other than for cost of living adjustments. The key point to remember is that she must have reached her own FRA in order to choose the spousal benefit versus being forced to take the larger of her own or the spousal benefit.

The benefit of this is that the wife (or husband, it works for either spouse) can collect spousal benefits for four years while also earning delayed credits by waiting to claim her own benefit until age 70.

Now, how do you avoid the mandate that the husband must have filed for his benefit in order for his wife to collect a spousal benefit?

File and Suspend

Buried in the Freedom to Work Act of 2000 is a provision that permits workers who have reached full retirement age to earn a delayed retirement credit for any month the retired worker requests that benefits not be paid, even though he or she is already on the benefit rolls, up to age 70. This is the authority for “file and suspend.” So one spouse can file and suspend allowing the other spouse to claim a spousal benefit (assuming both have reached their FRA) for a few years, allowing both of them to delay their own benefits to capture the increase. When there are sufficient sources of income and longevity in both families, this is a valid and valuable retirement strategy.

WEP and GPO

So far, so good. Now let’s throw a wrinkle into the plan. Remember that John has a government pension from employment where he did not contribute to Social Security.  Therefore, his Social Security benefit is reduced by a formula called the Windfall Elimination Provision (WEP). The maximum reduction in his Social Security benefit would be $396 monthly.

If Susan claims a spousal benefit from John’s earnings record, her benefit will be based upon his WEP reduced benefit, not the original PIA. If John dies, her survivor benefit would be based upon the original PIA, not the WEP reduced benefit.

If John decides to claim a spousal benefit on Susan’s earnings record, he gets hit with the Government Pension Offset. This rule reduces his spousal, widow, or survivor benefit by an amount equal to two-thirds of his pension benefit, even if it reduces the benefit to zero.

In their case, the best option is for John to claim and suspend his benefit at his FRA this year. Susan will file for the spousal benefits only based upon John’s WEP-reduced PIA at her FRA. Both will delay claiming their own benefits until they each reach age 70. Meanwhile, they will have an additional $630 a month to spend.

The Telephone Lottery

For some reason, the Social Security Administration must be trying to keep information about this claiming strategy a secret from their own staff. When my clients called their local office to discuss this strategy, they were abruptly told, “I’ve been here 20 years, and I’ve never heard of that!”

When they called back for an actual in-person appointment and described what they wanted to do, they were asked, “Why on earth would you want to file and suspend? I’ve been here 17 years and I’ve never heard of that!” Then the line went dead.They called back a third time and luckily reached a knowledgeable person who was able to tell them what documents to bring to their appointment.

So, if at first you don’t succeed, just hang up and keep calling until you reach someone who has read their own website!

It might actually be helpful to take a snapshot of the Freedom to Work Act available on the Social Security website, as well as this bulletin describing the ability of a spouse who has reached FRA to choose between their own or a spousal benefit. Two other useful items are the WEP bulletin, and the GPO bulletin.