Executive Summary
As more and more baby boomers reach retirement age, planning for how to maximize Social Security benefits continues to become more popular as well. While the Social Security rules allow for a great deal of flexibility about when member or the other of a couple applies for benefits, the complexity of the various adjustments creates a great deal of confusion.
An especially popular strategy for maximizing Social Security benefits is to utilize the "file-and-suspend" rules, which permits an individual to file for benefits but then suspend them immediately, allowing delayed retirement credits to be earned while simultaneously still allowing a spouse to begin to receive spousal benefits, and even family benefits for minor children as well.
Yet as it turns out, the file-and-suspend strategy is not just an effective planning tool for couples and families with minor children. Because benefits that have been voluntarily suspended can be subsequently reinstated, even single individuals may wish to routinely file-and-suspend if they intend to delay anyway, as a way to "hedge" against a future change in circumstances. On the other hand, there are caveats of the file-and-suspend strategy that must be navigated as well, including the fact that suspending will result in a suspension of all benefits (which limits couples from criss-crossing spousal benefits by having each file and suspend), and the fact that filing and suspending still triggers the onset of Medicare Part A benefits, which can render someone who chooses to file and suspend to be ineligible to make any more contributions to a Health Savings Account (HSA).
(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.)
Understanding The File-And-Suspend Rules
The basic concept of the file-and-suspend is relatively straightforward: the individual files for retirement benefits (triggering all the rules that normally apply when someone applies for benefits), but then suspends the benefits without receiving any payments (allowing him/her to earn delayed retirement credits that increase the future retirement benefit by 8% of the individual's primary insurance amount).
The primary purpose of pursuing the strategy is that, by filing for benefits, the individual can render his/her spouse eligible for spousal benefits (which only apply once the primary worker has applied for retirement benefits), while the individual themselves can still earn delayed retirement credits.
Example 1. Jim, a 66-year-old worker eligible for a $1,500/month benefit, can choose to file-and-suspend, allowing his 66-year-old wife Betty to begin a $750/month spousal benefit, even as 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.
Notably, the ability to suspend benefits is available only to those who have reached full retirement age (66 years old for those born between 1943 and 1954; as high as age 67 for those born in 1960 or later); if benefits are filed early, the election generally cannot be undone (though you can change your mind and withdraw your application within 12 months of when you first filed). However, it's notable that even if benefits were filed early, they can still be suspended going forward once full retirement age is reached; this will not undo the reduction that applies for taking benefits early, though it can almost fully offset the original reduction as delayed retirement credits are earned.
Example 2. 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.)
Notably, while the file-and-suspend strategy is often explained as a Social Security "loophole" to maximize benefits, in reality it was a separate provision specifically added to the Social Security system in 2000 under the Senior Citizens' Freedom To Work Act to allow the associated planning strategies to be done, especially regarding planning for couples' benefits.
File-And-Suspend for Couples
As noted earlier in example 1, the primary purpose of the file-and-suspend strategy is for married couples to better coordinate the claiming of individual and spousal benefits - in particular, for one member of the couple to claim spousal benefits, while the other person continues to defer individual retirement benefits to accrue delayed retirement credits. Otherwise, both members of the couple could face benefit delays even if just one of them was trying to delay.
Example 3. Continuing example 1, if Jim had chosen to just outright delay benefits, without going through the file-and-suspend strategy, not only would he have waited on his retirement benefits until age 70, but Betty would have been forced to wait until age 70 as well. This is true because the standard rules for spousal benefits state that Betty is not eligible for spousal benefits based on Jim's earnings until Jim has filed for benefits.
Notably, file-and-suspend may be relevant even in situations where both spouses have their own benefits, but each wishes to delay and wait on their benefits. By adopting the file-and-suspend strategy, one spouse can claim benefits while both generate delayed retirement credits.
Example 4. Harold and Sheila are both 66 years old; Harold is eligible for $1,600/month in benefits, and Sheila for $1,300/month, based on their respective earnings histories. Both Harold and Sheila are very healthy and wish to hedge against the risk that they both live well into their 90s, so both of them would like to wait on their benefits and earn delayed retirement credits. If Harold goes through the file-and-suspend process, then Sheila can file a restricted application for just spousal benefits (while delaying her own individual benefits). The end result: Sheila receives $800/month in spousal benefits now based on Harold's record, Sheila can switch to her $1,300/month individual benefit in the future (and earn 8%/year in delayed retirement credits while she waits), and because Harold filed-and-suspended he will continue to earn 8%/year delayed retirement credits on his benefit as well.
Another benefit of the file-and-suspend rules is that by filing, the primary worker not only activates eligibility for a spouse to claim spousal benefits, but also for dependent benefits to be paid on behalf of minor children as well (albeit subject to the maximum family benefit limitations). Thus, the file-and-suspend strategy can be effective for couples, and families with minor children as well (whether the parents are a couple or a single individual heading the household!).
File-And-Suspend For Individuals
The primary purpose of the file-and-suspend rule is for married couples to have a means to start spousal benefits for one member of the couple while allowing the other to continue to earn delayed retirement credits, and/or for dependent benefits to begin for the family as well. As an ancillary benefit, the suspend strategy also allows those who started benefits early to "change their mind" and suspend benefits, beginning to earn delayed retirement credits that can at least partially offset the reductions that may have occurred from starting early. However, another planning opportunity with file-and-suspend emerges, that may be relevant for married couples but is also relevant for individuals, due to how filing for retroactive benefits works with Social Security.
Under the standard Social Security rules, those who are full retirement age can file for retroactive benefits, but only as far back as 6 months (resulting in a lump sum payment of 6 months of prior benefits). Thus, for instance, an individual who is 66-and-a-half can retroactively file for benefits back to age 66, receiving make-up payments for the prior 6 months (and treating benefits as though they began back then, so there won't be a half-year of delayed retirement credits). However, if the individual decides at age 68 to file for retroactive benefits, the payments can still only go back to age 67 1/2.
On the other hand, if the individual files-and-suspends at full retirement age, a subsequent filing for retroactive benefits goes all the way back to the date of the file-and-suspend. The reason is that under Social Security rules, there's a difference between the standard filing for retroactive benefits, and requesting to reinstate voluntarily suspended benefits. While the former can only go back 6 months, the latter always goes back to the date of the voluntary suspension.
As a result of these rules, an individual who plans to delay benefits anyway may choose to file-and-suspend, rather than simply waiting. The set of examples below illustrates why:
Example 5a. Margaret is a single 66-year-old woman eligible for a $1,600/month retirement benefit. Due to her good health, she plans to delay her retirement benefits until age 70 to earn delayed retirement credits. However, at age 68, Margaret gets the unfortunate news that her health has taken a significant turn for the worse, and she will not be expected to live much longer. Realizing there's no longer much reason to delay her Social Security benefits, she applies immediately - and retroactively - but at best she can only get benefits going back to age 67 1/2 (a 6-month lump sum retroactive payment), and then begin her payments going forward (which will be approximately 12% higher due to 1.5 years of delayed retirement credits from age 66 to 67 1/2).
Example 5b. Continuing the prior example, had Margaret filed and suspended at age 66, then when she got the unfortunate news 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 $1,600/month, without any delayed retirement credit increases). As a result of the file-and-suspend strategy, Margaret was able to recover a larger portion of her delayed benefits given her change in health. And notably, had Margaret lived all the way to age 70 and still been healthy, should could have simply started her retirement benefits at that time, earning the same age-70 delayed-retirement-credit benefit she would have had without filing and suspending (but without the opportunity to change her mind.
Arguably, given that filing and suspending allows retirees to hedge their bets and allow them to change their minds later and receive a lump sum for all the benefits they had waited upon (albeit without any adjustment for foregone interest), and at worst benefits are simply started with the same delayed retirement credits they would have had anyway, there is little reason not to routinely have retirees - individuals or couples - who plan to delay benefits anyway, to file and suspend along the way, just for the flexibility.
Caveats To The File And Suspend Strategy
Notwithstanding the prospective planning benefits of the file-and-suspend strategy, there are a few important caveats to note.
The first is that the request to suspend benefits will suspend all benefits that the individual is eligible for. This means if the worker was already receiving any other form of Social Security benefit, it will be suspended too. Similarly, this is also the reason why a married couple cannot "criss-cross" the file-and-suspend strategy so each can claim spousal benefits while earning delayed retirement credits.
Example 6. Continuing example 4 earlier, where Harold was 66 and eligible for $1,600/month in benefits, and his wife Sheila was also 66 and eligible for $1,300/month in benefits, it's an appealing opportunity for Harold to file-and-suspend so Sheila can file a restricted application to begin to claim an $800/month spousal benefit while still delaying her individual benefit. However, if Sheila tries to also file-and-suspend so Harold can do the same thing, the strategy falls apart; when Sheila files and suspends her benefits, she will suspend not only her individual benefit, but also the spousal benefit she was getting from Harold, and at the same time the fact that Harold already filed and suspended means he won't be able to claim a spousal benefit even after Sheila goes through the process. Thus, the couple must decide which direction to go - Harold filing and suspending and Sheila claiming spousal benefits, or vice versa - but cannot do both.
The second caveat is that by going through the file-and-suspend election, the act of filing doesn't only render a spouse eligible for Social Security spousal benefits - it also renders the individual who filed eligible for Medicare Part A. And unlike Social Security benefits or Medicare Part B, it's not possible to opt out of Medicare Part A - enrollment is automatic for anyone who's over age 65 who applies for Social Security benefits.
While in general this automatic enrollment in Medicare Part A isn't necessarily problematic - at worst, it's duplicative or "extra" coverage, but it doesn't have any separate premiums or cost like Medicare Part B - the challenge is that once an individual is enrolled in Medicare, he/she is no longer eligible to contribute to a Health Savings Account (HSA). Thus, for someone who otherwise has a high-deductible health plan and wishes to make ongoing HSA contributions, the decision to file-and-suspend will render him/her ineligible to continue to make any new contributions (though existing funds in the HSA can remain, and are still eligible for tax-free distribution for eligible medical expenses.
Notwithstanding these caveats, though, the fact remains that the file-and-suspend strategy provides a great deal of flexibility, and a lot of opportunity for Social Security benefits maximization, not to mention the ability to hedge the risk of delaying benefits with the potential to reinstate the voluntarily suspending benefits in the future!
