The End of Having Your Cake and Eating It Too – Social Security Edition

by Danielle Finnerty 

We’ve all heard the old saying, “You can’t have your cake and eat it too.”  While the validity of this statement has always been questionable to me, the use of the file and suspend strategy for receiving Social Security benefits bolsters the side of the argument that says this age old phrase is false. 

First, let’s review what this strategy actually entails, and I’ll insert the cake metaphor as I go.  To put it simply, a person exercising file and suspend files for Social Security benefits at full retirement age, then immediately suspends them (has their cake).  This suspension allows the primary worker to earn an 8% delayed retirement credit each year while also making his/her spouse eligible for spousal benefits (eats it too).  The person gets to enjoy the benefits of SS via his/her spouse while still growing their own benefit until later – having your cake and eating it too.  In this case though, the cake is something that you have worked for and paid into for your entire life, so it is probably more enjoyable than your standard, frosted sheet cake.

This practice of file and suspend will no longer be allowed though due to the passing of the Bipartisan Budget Act on Nov. 2, 2015.  This means that if the primary worker decides to suspend his/her benefits, all benefits paid to others based upon the same working record will also be suspended.  Thus, switching its support for the legitimacy of the cake statement to team true.

Here’s what you need to know:

You have some time! The new rules do not start immediately. 

If you are at full retirement age or will be within six months, you can still file and suspend until Apr. 29, 2016 when the rule goes into effect.  So if you fit into this age range, don’t worry too much, you still have time to meet with a Social Security rep, consult with your financial advisor, and make a decision.  Your cake options are still open.

 

If you are already receiving benefits through file and suspend, you will not be impacted at all.

If you have already filed and suspended, then you also don’t need to be concerned.  There will be no retroactive changes made to your filing status. The same goes for those who file and suspend during this Nov. 2nd to Apr. 29th waiting period; nothing will change about your benefits on Apr. 30th due to this Act.  You can keep proving the person who invented this cake statement wrong.

 

Individuals will also no longer be able to utilize file and suspend.

Currently, individuals who intend to delay taking benefits until full retirement age can choose to file and suspend in order to build up delayed retirement credits.  This strategy is used in case the person decides to change their plans and receive benefits before full retirement.  They could then go back and collect every benefit from the date they suspended in a lump sum.  This will no longer be an option.  Individuals are in the same cake-restricted boat as married couples and will no longer be able to use this technique.

 

The new legislation does not affect your ability to postpone receipt of your own Social Security benefits.

You can still take advantage of delayed retirement credits by postponing when you start receiving benefits.  Nothing about this strategy has changed, so you can still make the most of that 8% bump.

 

While this act does eliminate a commonly used Social Security strategy, you still have options to maximize your benefits and make them available to your spouse.  If you will reach full retirement before Apr. 29th, you have even more options and should make an appointment with Social Security and your advisor as soon as you can.  In the meantime, the question still remains – can you really have your cake and eat it too?

Commonwealth Financial Network® does not provide legal or tax advice.  You should consult a legal or tax professional regarding your individual situation.