Executive Summary
The Social Security file-and-suspend strategy has been used primarily for couples to coordinate the delay of individual retirement benefits (earning delayed retirement credits) while making a spouse eligible to begin his/her spousal benefits. It can also be used as a partial form of "undo" for a retiree who started benefits early, and later wishes to suspend them (at full retirement age) to earn delayed retirement credits (a benefits increase that can partially or fully offset the decrease triggered by electing benefits early in the first place).
However, the strategy to file and suspend can also be used as a proactive planning strategy for individuals, because it creates an opportunity for the retiree to subsequently "undo" the decision to delay and "retroactively" claim benefits back to the date they chose to file and suspend (e.g., full retirement age). Thus, for someone who is approaching age 66 and isn't certain about whether it's a good idea to delay or not, choosing to file and suspend allows them to wait until age 70 to make the final decision, enjoying the benefits of the delay if it still makes sense to do so, but having the opportunity to go back and claim benefits at 66 if there's a change in health or circumstances.
The key distinction is that while the standard Social Security rules only allow an individual to file for up to 6 months' worth of retroactive benefits, the file-and-suspend rules allow for a "reinstatement of voluntarily suspended benefits" that can undo the suspension going back anytime during the suspension period. Thus, choosing to file and suspend can effectively replace the normal 6-month retroactive benefits rules with a more favorable set of reinstatement rules, that at worst will simply leave the individual delaying until age 70 as was planned in the first place, but with the flexibility to change their mind for a few years along the way!
(Michael's Note: The Social Security claiming strategies discussed in this article have been materially impacted by the Bipartisan Budget Act of 2015, which has eliminated most forms of the File-and-Suspend strategy. See "Congress Is Killing The File-And-Suspend And Restricted Application Social Security Strategies" for further details.)
The inspiration for today's blog post is a series of recent "MailBag" emails I've received from planners who were trying to engage in the file-and-suspend-for-individuals strategy that was discussed earlier in the year on this blog. All of them have been struggling with recent interactions they've had with their clients and the local Social Security office, which has insisted that the strategy doesn't work or cannot be done.
Planner #1: Michael, when I spoke to a Social Security person today about individual file and suspend, they were unable to locate any authorization beyond the six months retroactive. Could you please provide some further authority for your recommendation?
Planner #2: So, we asked about him filing and suspending today, since we were there. Pointedly, the representative said there was no point and no benefit to doing that – it only mattered if we met certain criteria for spousal or family benefits, none of which we met since I am not at FRA and we have no children/disability to consider. I took a couple of passes at this issue but got the same result, so I specifically asked about the retroactive benefits: If my husband files and suspends today, then comes back in 3 years asking for retroactive benefits, does he get benefits back to today? A very clear NO! was the reply. Six months is the maximum and the retroactive of course sets the benefit value to the age 6 months prior; but 6 months is it! She said under no circumstances did they go further back, and there was no point to him filing and suspending today.
Planner #3: My client has gone back to the SSA about filing and suspending 3 times and is getting the run around as no one seems to be able to verify what the contention was in your article. Any further thoughts?
To understand the issues involved, and why there has been such confusion, it's necessary to review the rules for file and suspend as they were originally intended, and then explore the difference between a "normal" attempt to apply for retroactive benefits, and what happens when an individual who followed the file-and-suspend path changes their mind and wants to undo the decision.
Social Security’s File-And-Suspend Rules Under The “Senior Citizens’ Freedom To Work Act Of 2000”
Under the Senior Citizens’ Freedom To Work Act of 2000, individuals who had reached full retirement age first became eligible to request that they not be paid retirement benefits that they are otherwise for, in order to earn Delayed Retirement Credits (DRCs) from full retirement age until age 70. The introduction of this provision allowed retirees who started their benefits early (reducing their payments) to voluntarily suspend and earn delayed retirement credits (increasing the subsequent payments by 8% per year of delay) - which is not quite an "undo" of an early Social Security benefits election, but accomplishes close to the same thing.
Example 1. A 66-year-old individual who was eligible for a $1,000/month benefit filed for benefits early at age 62, reducing benefits by 25% to $750/month. If the individual now chooses to suspend benefits, he can begin to earn 8%/year delayed retirement credits for the next four years, ultimately increasing the benefit by 32% back up to $990/month. (Ongoing cost-of-living adjustments would also be applied along the way.)
The opportunity to suspend benefits also introduced the planning strategy to “file and suspend” all at once, which has since become increasingly popular as a Social Security planning strategy for couples to maximize the coordination of individual and spousal benefits, because of the rule that a spouse cannot claim a spousal benefit until the primary worker files for benefits as well.
Example 2. Jim, a 66-year-old worker eligible for a $1,500/month benefit, is married to Betty, who is also 66. Jim and Betty want to delay Jim’s benefits to age 70 to increase both his benefit by 32% (4 years of delayed retirement credits at 8% per year), but also the survivor benefit that Betty will be eligible for if Jim passes away first. However, as long as Jim continues to delay his retirement benefits, Betty cannot claim her spousal benefits… which is especially unfortunate now, as Betty will not earn delayed retirement credits while she waits from age 66 to 70, even as Jim earns delayed retirement credits waiting for his own payments.
To resolve this issue, Jim can choose to file-and-suspend. By filing for benefits, he renders Betty eligible to begin her $750/month spousal benefit. Yet by suspending his benefits, Jim continues to accrue 8%/year delayed retirement credits on his $1,500/month, allowing it to ultimately rise to $1,980/month (plus cost-of-living adjustments) by age 70, even as Betty claims her benefits along the way.
File-And-Suspend For Individuals
While the file-and-suspend rules allow a married couple to coordinate individual and spousal benefits, and also present a form of “undo” opportunity for those who start individual benefits early to stop the payments and still earn delayed retirement credits, the file-and-suspend rules allow for a unique opportunity for individuals as well, who plan to delay their retirement benefits but wish to have an “undo” in case they change their mind later and regret the decision to delay.
Example 3a. Margaret is a single 66-year-old woman (at her full retirement age) eligible for a $1,500/month retirement benefit. Since she is in good health, she intends to wait until age 70 and earn 8%/year delayed retirement credits, boosting her benefit to $1,980/month (plus cost-of-living adjustments). Unfortunately, though, after 2 years (at age 68) Margaret gets diagnosed with a serious form of cancer, and although the symptoms can be managed, treatment is limited and her life expectancy is significantly diminished given the turn of events. At this point, there’s little reason to delay benefits any longer, as Margaret is unlikely to reach the “breakeven point” for delaying, so she can start her payments immediately at age 68 at $1,740/month (2 years’ worth of 8% DRCs), or file for retroactive benefits going back to age 67 ½ (which will provide her a 6-month lump sum retroactive payment, but undo the last 6 months’ worth of delayed retirement credits, so her payments will only be $1,680/month going forward).
Example 3b. Continuing the prior example, had Margaret filed and suspended at age 66, then she could have waited until age 70 to earn her 4 years x 8% DRCs = 32% benefit increase, as she was going to anyway. However, by filing and suspending, when Margaret got the bad news about her change in health at age 68, she would be eligible to reinstate her suspended benefits going all the way back to age 66 - which means she'd receive a lump sum payment for not just 6 months, but 24 months of payments (and going forward, her payments for her short remaining life expectancy would be her original $1,500/month, without any delayed retirement credit increases).
The value of this file-and-suspend strategy for individuals is that if Margaret remains healthy and continues to choose to delay, her benefits at age 70 (with delayed retirement credits) will be the same as they would have been by just waiting in the first place; however, if Margaret has a change in health and discovers that she doesn’t want to delay (and wishes she never had in the first place), by filing and suspending first she opens the door to giving up her delayed retirement credits and going back to get all the benefits as of full retirement age as though she started there in the first place! (Though once Margaret reaches age 70 and starts her benefits with the delayed retirement credit increases, the delayed benefits are locked in for good.)
Reinstatement Of Voluntary Suspension Versus Retroactive Benefits
As the MailBag emails noted earlier, several planners have attempted to engage in this strategy with their clients by going into the Social Security Administration offices, only to be rebuffed by Social Security employees who state that it is not possible to file for retroactive benefits more than 6 months, regardless of the file-and-suspend strategy… and that as a result, there’s really no reason for an individual to file and suspend at all.
Under the standard rules for Social Security, it is true that those who are full retirement age can file for retroactive benefits, but only as far back as 6 months of prior benefits. However, when someone chooses to file and then suspends benefits, and later chooses to undo the suspension, technically the decision is not an application for retroactive benefits. Instead, it is a request for “reinstatement of benefits that were voluntarily suspending”, which is an entirely different set of rules. And as the Social Security Administration’s own “Program Operations Manual System” (POMS) guidance explains, an individual “who requested suspension may request at any time to have benefits reinstated effective for any month of the suspension period.” (emphasis mine)
In other words, there is a difference under the Social Security rules between a filing for “retroactive benefits” (going back 6 months) and a filing for the “reinstatement of benefits that were voluntarily suspended” instead (going back anytime in the suspension period, including back to the day the suspension was done at full retirement age). Or as the Social Security Administration explains it on its own consumer guidance on suspending retirement benefits, “If you change your mind and want the payments to start before age 70, just tell us when you want your benefits reinstated (orally or in writing). Your request may include benefits for any months when your payments were suspended.”
However, executing the strategy does require going in person to the local Social Security office (to complete the file-and-suspend process), and if they ask “why” it’s important to explain that your intention is not about being able to claim retroactive benefits later (which are only ever up to 6 months) but that you want to leave the door open to the potential that you change your mind in the future and might want reinstate your voluntarily suspended benefits back to the full retirement age when you filed-and-suspended the benefits in the first place. You may even wish to cite the aforementioned references; the specific section of POMS with these rules is Section B of “GN 02409.130: Voluntary Suspension Reinstatement” (not to mention the SSA’s own consumer page on suspending benefits).
From the planning perspective, this arguably suggests that virtually any individual who plans to delay benefits should go ahead and plan to file-and-suspend at full retirement age instead. (Note: since “suspension” will suspend all benefits to which the individual is entitled, the situation is more complex in the case of married couples, those eligible for survivor benefits, or households with minor children who may also be eligible for benefits.) Most of the time, this file-and-suspend strategy for individuals won’t matter, for the simple reason that most people will live from age 66 to age 70 without a material change in health that would necessitate a reinstatement of voluntarily suspended benefits (which means benefits will simply start at age 70 as they would have anyway). And notably, once the individual reaches age 70 and the prospective suspension period ends as delayed benefits actually do begin, it's no longer possible to go back and reinstate earlier. However, from the planning perspective, there’s little downside to going through the process (aside from the time it actually takes to go through the process!) if there are no other people/benefits involved anyway, as it does leave the door open in that age 66 to 70 time window just in case there is a change in circumstances down the road…
