Fewer Social Security Options for Married Couples

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Legislation recently passed by Congress will phase out some strategies used by many married couples to maximize their Social Security benefits. The options known as “restricted application” and “file and suspend” will not be available to most future retirees. Congress supported these provisions when it wrote the Senior Citizens Freedom to Work Act of 2000, which it passed unanimously. Apparently, it has now come to regard them as costly loopholes. Congress wasn’t too eager to publicize their demise, however, since it rushed the new legislation through without hearings or public debate.

“Restricted application”

Under the previous rules, married persons who reached full retirement age (such as age 66 for those born between 1943 and 1954) could choose to apply for spousal benefits only, basing their benefit only on their partner’s earnings for the time being. That way, they could let their benefits based on their own earnings grow, since Social Security offers an 8% bonus for each year one waits to take benefits, up to age 70. They could then switch from spousal benefits to retirement benefits. Under the new rules, this option will only be available for older couples, those who already turned 62 before 2016.

For some couples, this might be regarded as a way of gaming the system. If a high-income husband wants to earn a bonus by delaying benefits, that’s a tradeoff that doesn’t cost the system money. But while he’s waiting, should he also get an additional benefit by claiming the status of a dependent spouse? That is probably not what was originally¬†intended by spousal benefits.

On the other hand, restricted application looks more reasonable for spouses who really are dependent because their earnings are much lower than their partner’s. The basic spousal benefit is 50% of the partner’s benefit. If a husband’s basic benefit is $1,600 a month, his wife can claim a benefit of $800 even without earning any money or paying any Social Security taxes. But suppose she does earn money, pay taxes, and qualify for a retirement benefit of $800 on her own record. If she is not allowed to file for spousal benefits alone, she will gain nothing, since spousal benefits are reduced by one dollar for each dollar of retirement benefits she has earned. If she can file for spousal benefits alone at full retirement age, say 66, she can get $800 now, while seeing her retirement benefit grow to $1,056 by age 70. That way, she does gain something by working and paying taxes. Isn’t that only fair?

“File and suspend”

Under Social Security rules, married persons cannot receive spousal benefits until their partners have claimed their retirement benefits. That can be inconvenient, since partners may wish to delay claiming benefits as long as possible to take advantage of the 8%-per-year bonus. This is especially true for higher-income men who are likely to die before their wives; they want them to inherit as large a benefit as possible. The “file and suspend” option has allowed retirees to claim benefits but not actually receive them until later. A husband with a $2,000 benefit could file and suspend at age 66, allowing his wife to qualify for an immediate $1,000 spousal benefit. He could then take an enhanced benefit of $2,640 at age 70, which his wife could inherit when he died. This option will now only be available for those who turn 66 by May 2, 2016. For younger couples, spouses will not be able to receive spousal benefits until their partners are ready to receive their benefits as well.

To me, this isn’t as much about closing a loophole as making a political decision to reduce support for spousal benefits. A husband’s decision to defer benefits doesn’t cost the system any money, so why should it prevent his wife from receiving her spousal benefits on time, at normal retirement age? His retirement benefit goes up if he waits, but her spousal benefit does not, since it is tied to his basic benefit, not his enhanced benefit. There is a penalty for taking it before full retirement age, but no bonus for taking it later. Making one partner give up spousal benefits because the other partner defers retirement benefits seems illogical and unfair.

Rethinking family benefits

In the present era of family diversity, the whole question of what is fair to different kinds of families needs some reconsideration. The Social Security system works best for the old-fashioned family where one spouse earns all the money and the other relies on a spousal benefit. If the husband earns a retirement benefit of $2,000, his wife gets another $1,000. But a couple where each partner earns a $1,000 benefit gets only the combined $2,000, since their earnings wipe out any spousal benefit. (Neither can claim a $500 spousal benefit, since each has a larger benefit from earnings.) One has to wonder why couples with the same combined income and payroll taxes should wind up with different benefits because of the way the income is distributed between the partners.

Another problem is that we have benefits for spouses and ex-spouses, but not for parents as such. Wives of high-earning men get good benefits whether they raise children or not, while single parents have to rely for their old age on whatever money they are able to earn. The system rewards marital dependency, but not the actual work of raising families.

The current “reforms” seem primarily a way of reducing benefits for many married couples, without doing anything to raise benefits for families shortchanged by the current rules.

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