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Budget Agreement Closes Social Security Loopholes

November 4, 2015: We have updated this post to reflect new information from the Social Security Administration.

Among its laudable features, the new budget agreement closes two Social Security loopholes and slightly improves the program’s financial health.

Some couples currently get a windfall by claiming one type of Social Security benefit at full retirement age and then later claiming another, higher benefit that includes a bonus for “delayed claiming” — even though they didn’t actually delay.  Best-selling books and the media have promoted these strategies.

The budget deal rightly ends such gaming, and future beneficiaries won’t be able to engage in it once this provision takes effect; current beneficiaries won’t be affected.  Organizations including AARP, Social Security Works, and the National Committee to Preserve Social Security and Medicare support this move.

Here’s what you should know about this provision:

  • Beneficiaries will no longer get a reward for delaying their Social Security claims when they don’t actually delay.  Financial advisors have nicknamed these aggressive claiming strategies “file and suspend” and “claim now, claim more later.”  Here’s how they work.  One spouse claims a spousal benefit at full retirement age (currently 66), and delays claiming his or her own worker benefit until age 70.  This enables the worker to rack up bonus worker benefits — 8 percent per year past full retirement age — even as he or she receives a spousal benefit.  The credits for delayed retirement were designed to be cost-neutral, providing roughly the same lifetime benefits no matter when a person chooses to claim.  But beneficiaries who use these strategies undermine this formula and get more than their fair share.
  • Wealthier beneficiaries have been better able to use aggressive claiming strategies.  To use these strategies, beneficiaries must be married (or divorced, with a marriage of at least 10 years), and they must wait until the full retirement age to claim Social Security.  These couples have advantages that others don’t.  Most people can’t afford to wait until age 66 to begin receiving any Social Security or to age 70 to claim their retired worker benefit.  People who claim at the full retirement age typically have higher incomes and better education than those who claim earlier.  Married beneficiaries are also significantly less likely to be poor than others.
  • Ending this windfall will strengthen Social Security’s finances.  Less than 0.2 percent of beneficiaries — roughly 100,000 people — use these strategies, according to the Social Security Administration.  For each beneficiary who does, the windfall can add up to tens of thousands of dollars in extra benefits over a lifetime.  As a result, SSA’s actuaries estimate that curtailing these strategies will slightly improve Social Security’s long-run solvency.
  • Congress didn’t intend to create these loopholes. Changes to Social Security in 1983 and 2000 unintentionally created these windfall benefits, which were discovered only years later. The President and Congress are right to restore the law’s original intent.