An Overview of Social Security Claiming Strategies

When you reach age 62 you have a decision to make. Do you claim your social security benefits now or wait? Unfortunately, for the vast majority of the American population this is an easy decision to make. They claim as soon as they are eligible because they don't have other assets that can support them if they delay. For everyone else, the decision is much more complicated. However, it just got a bit less complicated after Congress took two popular claiming strategies off the table.

Let's start with the basics. Everyone who has worked for at least 10 years (less if you were born before 1929) has a social security benefit based on your work history. Your full retirement age (FRA) is somewhere between 65 and 67, depending on your when you were born. You can claim as early as age 62, but you will face a reduction from your FRA benefit of as much as 30%. You can also delay your benefit to age 70, earning an increase of 8% per year past your FRA.

If you are single you have a fairly easy decision to make - do you claim less now or more later? The answer to that question could be easily answered if you knew how long you would live. Why? The difference in your benefit payments between age 62 and 70 is calculated based on your actuarial life expectancy. In other words the government is guessing the age when you will die and trying to make your total lifetime income equal regardless of when you claim. Unfortunately (or maybe fortunately) you probably don't know exactly when you will die.

If you are married things get more complicated. If both spouses have a work history, you both have your own benefit. Whether you work or not, you are also eligible for what is called the spousal benefit. At FRA your spousal benefit is half the amount of your spouse's FRA benefit. Married couples need to not only decide when they should file for benefits, they also need to decide when their spouse should file for benefits.

There are two strategies available for couples that had become popular in recent years, but which were recently modified and/or eliminated by Congress. The first strategy is called the "file and suspend". Under this strategy, the higher-earning spouse would file and immediately suspend their benefits at FRA. Suspending their benefits allows their benefit to continue to earn the 8% increase per year but still allow their spouse to claim their spousal benefit. The second strategy is called the "restricted application", or claim now, claim more later". This allowed you to file for spousal benefits at FRA instead of their own benefit, if the spouse was already claiming their benefits. That allowed one spouse to continue to delay their own benefit and still receive a spousal benefit, while their own benefit received delayed retirement credits.  Congress is killing the restricted application strategy by extending the deemed filing rule to age 70. This means if their own retirement benefit is larger than their spousal benefit, they will not receive a spousal benefit. 

As is usually the case, the elimination of these strategies will be phased in. If you are already age 66, or if you turn 66 before April 30, 2016, you will still be eligible for the file and suspend strategy, to allow your eligible spouse or dependent child to file for benefits, while also increasing your future benefit.  If you were born before January 1, 1954, (age 62 by the end of 2015) you will still be eligible to file a restricted application, and at the time you file – your spouse must have already claimed their retirement benefits, or filed and suspended benefits before the effective date of the new rules. For everyone else, these strategies will be off the table. This means anyone who is age 66 now or turning 66 before April 30 should consider their options in case the file and suspend strategy makes sense for them.

Going forward it will still be important to evaluate your options before making a decision on your social security benefits. I continue to believe that anyone who is in good health and has the ability to delay their benefits should still do so, especially if you are the higher earner in a married couple. Rather than worrying about dying early and not "breaking even" on your benefits, you should consider the exponential benefit for you and possibly your spouse if you live longer than expected. Social security continues to be the best form of longevity insurance available and with people living longer and longer these days, it's a benefit that needs to be considered.