Christine Benz: Hi, I'm Christine Benz for Morningstar.com.
A Social Security strategy called file-and-suspend can be worth considering in many instances. Joining me to discuss this strategy is Mary Beth Franklin, a contributing editor at InvestmentNews, and she's also the author of a new e-book about Social Security planning.
Mary Beth, thank you so much for being here.
Mary Beth Franklin: Thanks for the invitation. I love coming to Morningstar.
Benz: One of the strategies that you frequently talk about in your work, and I know a lot of people look at when they think about Social Security planning, is what's called "file-and-suspend." Let's start out by discussing what is the strategy and how do you execute it?
Franklin: File-and-suspend is a really powerful strategy, particularly for married couples, to be able to maximize their lifetime Social Security benefits.
First of all, what is it? You are telling Social Security, I'm filing, but I want to immediately suspend my benefits. Why would you want to do that? It can trigger benefits for your spouse, assuming your spouse is old enough to collect benefits, meaning 62 or older. Or if you have minor dependent children in your household--defined as children under 18 or 19, if they are still in high school--you can file and suspend to trigger a benefit for them. In the meantime, your own benefit continues to grow at the rate of 8% per year between your full retirement age and 70.
Now, full retirement age right now is 66 for anybody born from 1943 through 1954. So, 66 is your magic age. To engage in file and suspend, the worker, that's you, has to be at least 66 to do so. You cannot do this if you claim benefits before 66.
Benz: Let's discuss a couple of situations where you think this strategy can be particularly effective. What types of couples should consider this sort of strategy?
Franklin: First of all, let's look at a married couple where you've got one spouse who is the bigger breadwinner. I'm going to say it's the husband, but frankly Social Security is a gender-neutral program; it could work either way.
But let's say this is Ozzie and Harriet. Harriet stayed home her whole life. Her only benefit she is entitled to is as a spouse. She does not have Social Security on her own work record. But her husband has listened to this conversation, and he knows the longer he waits to claim his Social Security benefit, the more it's going to be worth it. So, he likes that idea. But his wife really wants a benefit. So once he reaches 66, he can say to Social Security, I want to file and suspend, so my wife can collect her spousal benefits and mine will keep growing.
A spousal benefit is worth half of the worker's benefit if it's collected at full retirement age--less if it's collected earlier. So let's say, the husband is entitled to $1,000 a month at his full retirement age. The wife, if she was also 66--full retirement age--would be entitled to a benefit worth half that much, $500. She could collect as early as 62, but her benefit is going to be smaller. In this case, instead of a 50% benefit, it would be 35%. She'd get $350.
Benz: The idea is that you get some income flowing into the household early on, but the spouse waits as long as he or she possibly can …
Franklin: Right. Up to age 70 because these delayed retirement credits stop at age 70, so …
Benz: There's no benefit to waiting past age 70.
Franklin: Exactly. But it's a great way to get some income to the household now and more income into the household later. So that's one reason. That's file-and-suspend to trigger benefits for the spouse.
Now, there are many families out there with older fathers and younger second wives and families. If you have a child or two under age 18, and you want to keep your own benefits growing, it might make sense to file-and-suspend at 66, so that child or two or more could get benefits worth 50% of your worker benefit.
Now, it would stop when they either graduate from high school or turn 18, whichever is sooner, and there is a family maximum. You couldn't have 12 kids, and they'd all get 50% of your benefits. Generally, 150% to 180% of your benefit is what your family could collect. If they go over that amount, the dependents would scale back on their benefit; it would not affect your benefit, the worker.
Benz: You've talked a lot about married couples as well as families, but you note that file-and-suspend can actually be of interest to single people as well, perhaps as an insurance policy. Let's talk about how that might work?
Franklin: This is a very little-known application of the file-and-suspend strategy.
When you file-and-suspend at 66, you are saying to Social Security, I'm filing, opening my Social Security record, but don't pay me until later, so my benefits grow. But when you file-and-suspend, you lock in that date, and let's say two years later … you get a terminal diagnosis, and you're not going to live very long. As a single person who doesn't have to worry about spousal benefits or survivor benefits, suddenly longevity is not your worst concern. You can say to Social Security, I want a lump-sum payout back to the date of suspension. In this case, Social Security would pay you two years' worth of benefits in a lump sum. Now, that's instead of getting these delayed retirement credits worth 8% a year. You'd say, forget the bigger benefits; give me the lump sum now. I think this is a huge strategy for singles who plan to delay benefits anyway. It would be in your best interest at 66 to file-and-suspend, just in case.
Benz: Recently there has been a little bit of a discussion about this strategy, specifically. It was in the president's budget, a little notation about how high-income couples were perhaps taking too much advantage of this program. Is it potentially under threat, and should people rethink the decision to file-and-suspend given that?
Franklin: There was one sentence in the president's massive budget that said exactly as you said: Some high-income couples are taking advantage of aggressive claiming strategies, suggesting that these should be done away with. But the law that created this file-and-suspend strategy back in 2000 was called the Citizens' Freedom to Work Act. It was created for a different purpose, so that if someone had claimed benefits and then had to go back to work, they could suspend it and their spouses could keep collecting Social Security.
It took an act of Congress to create this strategy. It would take an act of Congress to undo it. As a former Capitol Hill reporter who covered the Social Security Reform Act of 1983, I don't see Congress ever taking this up as a stand-alone issue; [it would be] very controversial. It would most likely be part of a bigger Social Security reform package that must happen eventually before the trust funds run out of money--right now around 2033. But whether it happens tomorrow or 2033 is anybody's guess.
In the meantime, you would have plenty of notice if this was going to change. Congress seldom does anything retroactively. So I think current and near retirees can be very comfortable contemplating the use of this strategy. If you're younger and retirement is much further in the future, stay tuned, things could change.
Benz: Mary Beth, this is such an important topic. Thank you so much for being here to share some insights into this strategy.
Franklin: Thanks, Christine.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.