What Congress Just Did To Social Security

What Congress Just Did To Social Security
By U.S. Government [Public domain], via Wikimedia Commons

What Congress Just Did To Social Security by Luke Delorme

The U.S. budget deal includes a provision that seeks to end the file-and-suspend and restricted claiming strategies. I explained these strategies in recent blogs as a way to bring couples upwards of $60,000 more in total Social Security benefits.

The section of the bill is titled “Closure of Unintended Loopholes.” Let’s take a look at the details of the proposal, who it will affect, and what you can do now.

What’s the deal?

Under current law, two-earner couples have the option to have one spouse file for Social Security benefits without actually claiming the money (file and suspend) while the other spouse files a restricted application for only spousal benefits. In effect, both workers have been able to delay their own benefits until age 70, at which point they can claim the maximum available benefit. This strategy allowed them to claim “free money” – the spousal benefit for one spouse – over the course of four years. Filing the restricted application for spousal benefits had no impact on either spouse’s own earned benefit.

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The proposed legislation – which at this hour has passed Congress and awaits the president’s signature — will close this loophole. You will not be able to file and suspend and have a spouse claim a spousal benefit on your record. Nor will a spouse be able to file a restricted application for spousal benefits even if you are collecting. If you want to claim a spousal benefit, you will be “deemed” to claim your own, at which point you can no longer incur additional delayed retirement credits. In other words, once you claim spousal benefits, your benefits are not going to go up.

Who is affected?

The primary beneficiaries of this filing strategy were two-earner married households that were planning to delay benefits past the full retirement age. Since higher income people have more financial flexibility and the means to delay Social Security benefits, the strategy was primarily used by those households.

Also affected are ex-spouses who were hoping to file restricted applications for ex-spousal benefits while delaying their own benefits.

Will anyone still suspend benefits?

Technically, you will still be able to suspend benefits. What will change is that someone can’t file a restricted spousal benefit on your record, meaning there will be no advantage to file and suspend. However, some people will still choose to suspend benefits.

If you file, there is a one year window to withdraw your application (and pay back benefits) if you change your mind. If you’ve filed your benefits and it’s been more than a year but you had a change of heart, you can still suspend benefits (as long as you’re still below age 70).  Your benefits will be reduced for your early claiming, but suspending them can increase future benefits. Basically, this is still an option if you’ve changed your mind about when you want the money.

When will this change take effect, what can I do right now?

All of this is subject to further revision as it is unclear exactly how the details will play out, but it looks at this point as if people currently running the file and suspend strategy will be grandfathered in and are not scheduled to be affected by the legislation (this was not the case with the first draft of the bill). The new rules will kick in 180 days after the budget passes.

For people at least 65.5 years old when the legislation is enacted who have a spouse that is at least as old, they may be able to sneak in just under the wire and still take advantage of the existing file and suspend strategy.

People who are at least age 62 when the bill goes into effect will retain the eligibility to file a restricted application for spousal benefits, but the spouse must be claiming (not suspending) benefits. This will be helpful if the spouse is older and will be collecting benefits anyway.

The other option for couples with a younger spouse currently between ages 61.5 and 65.5 and an older spouse between 65.5 and 70 is to set in motion the start-stop-start strategy. This isn’t as good of a deal as the old file-and-suspend strategy, but it could still be financially beneficial. There are lots of “ifs” to look at here, but this is the idea. You could potentially do the following:

  1. Have the younger spouse collect early benefits (let’s assume it’s the wife for simplicity).
  2. Have the older spouse (the husband) file for restricted spousal benefits, grandfathered in under the new legislation.
  3. When the husband turns 70, have him switch from spousal to his own benefits.
  4. When the husband switches to his own benefits at age 70, have the wife suspend her benefits in order to get delayed retirement credits. Note that there will still be an overall reduction in her benefits based on early claiming. This may or may not make sense depending on your long-term plans.

For people under age 62 when the bill goes into effect, it seems there will be nothing you can do to get in on the old deal.

Who is not affected?

It seems that survivor benefits are not affected by the legislation. If you’re the surviving spouse of someone with an earned benefit, you are eligible for survivor benefits.

The calculation of these benefits is complicated, but if it was a much higher earning spouse who passed away, the spousal benefits are probably worth taking at the full retirement age. Survivor benefits do not go up past the full retirement age. This may mean claiming your own benefit early and then switching to survivor benefits.

On the other hand, if you earned significantly more than your spouse, it may be wise to take the reduced survivor benefit early and delay your own benefit until age 70. The deeming provision does not apply to survivor benefits, meaning you can still file for one type of benefit without affecting the other.

Is it a good idea to close the loophole?

According to the Center for Retirement Research, restricted claiming strategies (inclusive of file and suspend) had the potential to cost the Social Security system up to $10.5 billion per year. However, since only an estimated 100,000 people are taking advantage of the loophole, this amendment is only estimated to reduce the Social Security deficit by about 0.02 percentage points, reducing the total shortfall to about 2.66 percent of wages and income. That said, the popularity for restricted spousal claiming and file-and-suspend strategies has certainly grown. The laws that enabled these strategies were passed in 2000, meaning that we’ve only had 15 years to understand and take advantage of the loopholes.

It will certainly benefit the financial sustainability of the Social Security system to close these loopholes, even as it stinks for people that were planning on getting an extra $50 or $60 grand from the system. Since most of the benefit went to higher income people with the financial flexibility to delay claiming, closing the loophole probably won’t bring anyone to financial ruin. But it may force some people to work a little longer than expected or to modestly adjust retirement spending plans.

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Sources: Anne Tergesen, Wall Street Journal, Michael Kitces, Munnell, Sass, Golub-Sass, Karemcheva. 2009. Unusual Social Security Claiming Strategies: Costs and Distributional Effects.

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  1. There is loss of up to $62,000 for married couples in lifetime benefits. How is that not a “cut.” ? I know, because you think they are all rich and don’t need the money. Fine, means test SS and kill the entire program. That’s the Republican all along. And you fell for it.

  2. First of all, there is no cut in benefits. You can still defer to file for SS until you are 70. Just spouse can still draw while you do not collect but her benefit will not increase like it has been doing while you do not collect.

  3. well done! Write your Congressman, and quit AARP, which engineered this to save disability at the expense of seniors. AAA discount is better anyway.

  4. David, first, this is not about rich people. 27% of all filers could benefit from it. It’s a cut in benefits plain and simple, and when your turn comes, they are going to screw you too. Al least you could fight back instead of laying down to the people who are are planning to f**k you up the wazoo, It’s not the 27% who could file. The rich don’t care about this. It’s a rounding error to them.

  5. You better look it up and understand what the option afforded you. You don’t have it right. Both could have continue to defer to 70, while one collected spousal benefits. That might be argued to be closed, but for those of us who are at the doorsteps and have a stroke of pen to take it away without at least a phase in period is what is despicable here. All the planning and utilizing is blown away because of those yahoos in Washington who live in a fantasy world of their own creation is what the railing is all about. The whole government is waste of our money, it’s sieve on pet projects, crony capitalism, buying votes/appropriations, you can go on and on. We have no rights to over-sight this mess, so it will continue until the well goes dry.

  6. Of course I know what file and suspend is. My point is that the people against say it’s bad because it’s utilized primarily by the rich. I was trying to point out that the same could be said of deferring to age 70.5, but almost everyone is for it.

  7. People with IRA’s, 401″s and others that had money used this more often then poor people. This should not had been started anyway.

  8. You don’t even know what ‘file and suspend’ is, do you? It is not about putting off collecting until you are 70. It’s about marry people filing and one puts off collecting while the other collects so the benefit increases by 8% per year.

  9. David, the rich don’t care about this claiming strategy. They don’t need it and won’t miss it when its gone. Its the middle class who worked hard and contirbuted for 35 years or more and who made intelligent choices on their financial planning for retirment who suddenly have the rug pulled out from them.

  10. This alleged loophole would be beneficial 27% of all claimants, even though wealthier people did tend to know about it and use it much more, But that’s also true of deferring to age 70. Would you eliminate that too? However, that’s not my real gripe. They shouldn’t make changes that don’t give fair notice to people at or near retirement. For example, I have been taking withdrawals from my IRA for 6 years now, based on receiving this. Now, it’s quite obvious I am in a hole to the tune of $51K. Had I known this was disappearing, I would have taken out much less. Now I am really in a hole, and it’s a big problem not of my making. Many others are in the same situation.

  11. so we’ll close loopholes on those claiming social security but not businesses who continue to get subsidies and high wage earners. We need a flat tax and need one now. I believe in a progressive flat tax (no deductions) that lowers the upper rates. i believe every American should be tax that way they can experience the fun of paying for the Elitist exuberance of our seething government.

  12. Well if you want to talk about people getting more than their fair share, you should check into the deal the U,S, has with Mexico where we give Mexicans SS living in Mexico. YOU try going to say Germany and tell the government that you want their SS and see how far that gets you…Or better yet, go to Mexico and see if you can get their SS….The dems did that one to us

  13. We don’t need to fund the government, we just need to CUT it back. WAY too much federal interference. The states do almost everything the feds do…including Environmental, why do we need the EPA anymore? Every state does the same thing as EPA.

  14. Yeah, domestic matters is welfare. Their budget is NEVER cut, only the “entitlements” such as social security..you know the one we all paid into and actually worked for…not the lazy thugs that sit on their ars…es figuring out where to burn down business’ next because they don’t like America. They act just like their ancestors in Africa do,, they are so unhappy I don’t know why they just don’t go visit their people there. Those are the domestic programs…plus probably increasing the EPA’s budget so they can crush more business’….etal.

  15. I”d like to remind you NELORE that the present idiot in chief entered the WH with little and is now worth over $7MILLION…Rev Wright is worth so much he owes the IRS $8MILLION dollars. I can go on. Your assumption that Republicans are sucking the government dry holds no water..Wake up, they are all doing that now….and have been for decades…i.e. Clinton’s, who left the WH “poor” according to Hitlary, but somehow now is worth hundreds of MILLIONS in just a few years. They ought to be put in prison for how they robbed Americans of paying taxes. I can only hope the criminal indictments I’m reading about go through and the FBI has a solid case against them. They can take obummer with them for wrecking this country….that is unless NELORE you like what he’s done to America, in which case you need to be put in jail too.

  16. I wish journalists would stop calling this a “loophole.” Hundred of staffers and policy wonks designed this arrangement, and it’s been in place for years. It’s not like someone just discovered it and decided to try it out. It’s policy. It’s intentional. Its costs are known, and they’ve been supported by years of data and statistics.

    The problem with changing a policy like this on relatively short notice is that many people have arranged their affairs to take advantage of them. There is nothing wrong with this; we don’t write laws, Congress does, and we’re entitled to make use of them. This particular change will be very troublesome to at least some people nearing retirement age. I would not like to be the person who misses the grandfathering period by one day.

    I am also miffed that the first we heard about this was AFTER Congress passed it. If it had been announced earlier, there would have been an opportunity to remind our representatives who they work for.

  17. Sorry to tell you that any Congressman elected AFTER 1986 was put into the FERS retirement system, where they pay for SS and receive a pension AND SS benefits. On the other hand, they are all so wealthy they don’t really care about SS. Shame,

  18. RKP, it only takes 40 quarters to quaify (10 years). My mother is an example of one who never worked, raised the family and when became eligible drew 1/2 off of my fathers SS. I can’t address the newer workers, I think they all work, both spouses, so I can’t imagine who this would apply today, except for those spouses that don’t work (like my Mom).

  19. You think that any Washington politician will ever cut spending? Even the most ardent tea party types become part of the “governing” cabal in DC that funds more and more spending.

  20. Yes and there have been so many cases discovered wheres recipients on disability are actually out there working, and have been for years. The government just cannot keep up with this stuff, just like trying to keep up with immigrants who are or will become jihadists….America needs to toughen up on penallities…maybe start putting people on the old fashioned chain gangs or shoot them…I don’t know but something has to change, we are creating a third world country..

  21. It is so annoying to see Congress full of well connected millionaires that collect a well funded government pension and ROBBED the social secuity fund and left IOUs. They let corporations and elites leave Billions of dollars of tax revenue offshore. Its pathetic how the american people turn a blind eye to it. Shame on us.

  22. you mean Al Gore’s Lock Box..that was laughed out of the country in 2000…no one paid attention to it, except GWB opposition research that told them no American gave a cra/p about the issues..they just wanted to vote for the guy with the bible under the arms..never read or know /s/hit about..just said he did.

  23. The same millionaires complaining about social security and the government intervention etc etc,meaning rich Republicans, were the ones more likely sucking off the government tit..hypocrites.

  24. Libs will never go for that. They need all the fake or real SSDI beneficiaries. Since there are not enough legitimate SSDI beneficiaries, they need to fake disability crimes to approved.

  25. Agreed – keep SS only for SS purposes. If that means we need an across the board 5% income tax increase on everyone from minimum wage workers to gazillionaires, so be it.

  26. The worst part of the budget was, well, it had so many bad parts that let’s try to list some of them.
    a) Spending increases on defense.
    b) Spending increases on domestic matters.
    c) 18 wheeler sized loopholes in the teeny restraint on spending increases called the sequester.
    d) Rollback of Medicare premium increases.

    This is what our slimy politicians call “bipartisan” agreements for the sake of the people. Meaning they scratch each other’s back to buy votes from defense contractors and the welfare class.

  27. I have no sympathy for outrageous excesses like treating carried interest as capital gains. But the rich pay most of the taxes in this country. The bottom 50% or so pay NOTHING for the IRS, FBI, DEA, NIH etc. What we need is a tax increase on the rich and the middle class – example, treat home sale gains as ordinary income, treat carried interest for the Wall Street types as ordinary income; and yes, repeal the Bush tax cuts on the middle class – meaning anyone making LESS than 400K a year pays Clinton era tax rates; and repeal the child tax credit increases that Bush put it. Sounds very unpopular, but it’s a great way for liberals to show that they are serious to fund the government.

  28. Now, if Congress could only muster the SAME MOXY to get rid of the loop holes for the rich and corporate welfare!

    They have no problem going after seniors, but when it comes to big doners and corporations – not so much!

  29. Shame on you to make a conclusion it “only” effected high income taxpayer. Wrong assumption. It’s removal was aimed squarely at the middle class, who were only taking the time to review all options and have a plan on approaching their retirements. Some don’t take the time to do these reviews.

  30. YOU are the one who don’t get it. This only hurts rich people, unless you are rich and wanted to used this as an means of getting more money.This does not hurt poor people BUT you Republicans want poor people to think this will hurt them.

  31. You are absolutely right. They get big payoffs when only serving a small amount of time. Their salaries are outrageous. There are those of us who have worked for 50 years and now are ready to claim….and we are getting shafted royally by those who don’t mind giving to those who have never worked a day in their lives…but who collect and buy liquor and drugs and cigarettes, etc. Makes me so mad that they screwed the “Seniors” once again. If they were in the system….we would see major change.

  32. Yeah I tried to get my wife help years ago………….being denied twice the SS lady said DON’T GIVE UP…………but my wife did give up

  33. You still don’t get it, do you? The government DOESN’T GIVE A D@MN ABOUT US. Period. They are all in the same elite class, exempted from the laws they pass that apply to us. Nothing you say will make any difference. Sorry, that’s the truth.

  34. This article makes it sound like the Republican congress is at fault. Remember it was the Obama budget that proposed this and there was only five days to go through the entire federal budget prior to voting. Unfortunately John B. was the speaker of the house a republican in Democrate clothing tears and all who insisted on passing this bill prior to his quiting the congress.

  35. I think the f-n government needs to get their fingers out of the social security, it should never have been turned over to them to start with.

  36. No they don’t pay the lawyers. You do. It can take a year or more in court to collect disability. If you win, you get that year of benefits in one lump sum and YOU have to pay usually one-third of it to the lawyer. Social Security pays them nothing and you wouldn’t need a lawyer in the first place in they didn’t deny 60% of all people who apply for disability. I just went through this with a family member and that’s the way it works.

  37. Well it is about time they change these loopholes in the system if you did not earn the quarters you should not collect a dime until your otherhalf dies and if you divorce them then you get nothing at all 10 years of marrage is nothing in this world 50 years that is a very shot time to be married

  38. Not gaming the system and certainly not cheating. I assume you also take advantage of deductions on your income tax to reduce what you have to pay the government. Why shouldn’t someone use procedures that maximizes their benefit (or reduces their taxes) as long as it is legal?

  39. It is the republiCONS in the loopholes and doing the cheating……..but then the republiCON candidates want to get rid of Social Security, medicare, and medicaid all together

  40. What happened is a disgrace. This is the most significant change to Social Security in over 20 years, and it was done without even the pretense of public debate. All major SS changes have always protected people like you, ie., those who are at or near retirement, as well as those who are already retired. I do suggest that you write/email/call your Congressman and Senators. I also suggest you resign immediately from AARP, which backed this deal from day one, and which is now crowing about what a victory it is for seniors. They do not speak for us, but are only interested in selling overpriced annuities to seniors who are now cut out of this very useful and fair method.

  41. Sounds like another loophole to explain the other 1,000 loopholes.. We all live in a society of LoopHoles, and loopholes running the government by extornists, my bad government by LOOPHOLES.

  42. Now close any loophole for the people trying to get the disability benefits…. all I ever see on TV are those lawyer outfits saying they can get the benefits for these people…. something must be wrong if all those clown lawyers are fighting to get a person on disability…..I do know that every case they win SOCIAL SECURITY HAS TO PAY THEM FOR THE CHARGES

  43. Thanks for nothing Mr. President and SS. My wife and I are not rich or wealthy. What we did was work hard, save and never asked for any assistance. Now that we are close to collecting SS you want to change the rules so that we no longer can hold off on collecting SS until after age 70. We both paid into SS and fully expected to be able to collect $500.00 a month for a few years to help pay the bills. What I don’t understand is how a spouse that never worked or did not have the 35 required years can still collect half of the other spouses SS. How is this any different???

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