This Social Security Spousal Benefits Loophole Still Works
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Summary:
Certain Social Security benefits used to have ambiguous language that allowed individuals to take advantage of loopholes to receive additional retirement benefits on top of what they normally qualified for. The most aggressive of these loopholes were definitively closed by 2020, but the good news is that this social security spousal benefit loophole still works.
Prior to 2015, there were some pretty nifty loopholes to maximize your and your spouse’s Social Security benefits. Thanks to some ambiguous language regarding these benefits, you could take advantage of these loopholes to receive more retirement benefits than you were strictly eligible for.
One method, known as the “claim then suspend” method, allowed a worker to claim their benefits before full retirement age, then immediately suspend their benefits, therefore racking up retirement credits while still collecting the spousal benefit. Another strategy, the “spouse then worker” method, was to live off the lower-earning spouse’s benefit until the age of 70, at which point the primary wage earner’s much higher Social Security benefits could be collected.
These were considered “aggressive claiming strategies” by the Social Security Administration (SSA), which estimated that these tactics were mostly employed by more affluent individuals following the advice of financial planners. In response, Congress introduced the Bipartisan Budget Act of 2015 (BBA), effectively shutting down the exploitation of these loopholes.
In this article, we’ll explore the methods individuals have used to skirt the rules and claim more than their fair share of Social Security benefits, even while many other workers were barely getting by. More importantly, we’ll discuss the best ways you can still legally maximize your retirement benefits from Social Security.
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Purpose of Social Security retirement benefits
Throughout your working career, you pay taxes into Social Security, which is meant to replace a percentage of your preretirement income based on your highest 35 years of work history. How much you end up getting depends on how much you’ve made and when you opt to start receiving your benefits. The money is allotted for:
- People who have already retired
- People who are disabled
- Survivors of workers who have died
- Dependents of beneficiaries
For retirement purposes, workers are eligible for benefits as early as age 62, but when you reach full retirement age (which is now 67 for most people), you become eligible for full retirement benefits. If you wish, you can delay filing even further until age 70 and receive delayed retirement credits (DRCs), which will increase your retirement benefit amount per month.
There are advantages and disadvantages to receiving your retirement benefits earlier or later. If you choose to receive your own Social Security benefits before you reach full retirement age, you will be able to collect benefits for longer. However, the downside to this option is that your benefit amount will be permanently reduced.
Social Security loopholes explained
As previously mentioned, Social Security benefits are designed to replace the income lost when a wage earner retires, becomes disabled, or dies. To achieve income adequacy goals for lower- and middle-class workers, Congressional intent was that spousal benefits would supplement retirement income for retired couples with one primary earner — not provide a “bonus” benefit that high-income couples could manipulate to their financial advantage. Unfortunately, the latter scenario ended up happening in several different ways:
Deemed filing
Deemed filing, or timing of multiple benefits, means that when you file for either your own retirement benefit or your spouse’s benefit, you are required, or “deemed,” to have filed for the other benefit as well. The Bipartisan Budget Act extends deemed filing rules to apply at full retirement age and beyond.
Previously, some people were able to use a restricted application strategy to get their spouse’s benefits at full retirement age while allowing the retirement benefits based on their own higher earnings record to grow by delaying to file for themselves.
By changing the law, workers can still take advantage of increasing their retirement benefits by delaying, but they can’t collect one type of benefit (like spousal Social Security benefits) while delaying the other. In other words, no more “gaming the system” by allowing the larger benefit to grow significantly after first claiming benefits from the lower wage earner’s allotment.
Exceptions to deemed filing
There are a few exceptions to the rules that are designed to avoid excluding those in need. These are cases of a disability, a death in the family, caring for a dependent child, or a disabled dependent.
Specifically, deemed filing applies to retirement benefits, not survivor benefits. This means if you are a widow or widower, you may claim your survivor benefit independently of your own retirement benefit.
In addition, deemed filing also does not apply if you receive a spousal benefit and are also entitled to disability benefits. The same is true if you are receiving spousal benefits because you are caring for the retired worker’s child.
Voluntary suspension of benefits
Another former loophole in the system involved the option to voluntarily suspend benefits, also known as the “file and suspend” strategy. In this scenario, a worker would apply for their benefits at full retirement age, then voluntarily suspend payments.
This voluntary suspension permitted a spousal benefit to be paid to the worker’s spouse while the worker was not collecting their own benefits. Down the road, at about age 70, the worker could restart their suspended benefits, which by then would have increased due to delayed retirement credits for each month during the suspension.
As of the passing of the Bipartisan Budget Act, if you suspend your retirement benefits, other benefits payable on your record, such as a spousal benefit, are also suspended. If you have suspended your benefits, you also cannot continue to claim spousal benefits or any other benefits on anyone else’s record.
The purpose of this change in Social Security law is to make it fair to delay payments for the worker’s spouse and dependents if the worker hasn’t retired or is in a suspension period. Today, couples can no longer simultaneously receive a benefit and get a bonus for delaying to file for benefits.
Divorce loophole
There is one loophole that remains in regard to the voluntary suspension of benefits: it does not apply to spousal benefits for divorced couples. If you are a divorced spouse — even if your ex-spouse voluntarily suspends their claim benefits — you can continue to receive a divorced spousal benefit.
Strategies for maximizing retirement benefits from Social Security
You can no longer take advantage of the loopholes some couples exploited before the Bipartisan Budget Act. However, there are ways to maximize the benefits you are eligible for, and they often hinge on delaying your retirement benefits.
Married couples
As previously mentioned, if you need to, Social Security rules allow you to start collecting retirement benefits at a reduced amount, beginning as early as age 62. You could also wait until full retirement age (66 for most boomers and 67 for everyone born from 1960 on) and receive the total monthly benefit amount.
If one spouse was the major breadwinner and the other spouse has little to no benefits coming to them, the best strategy is to delay filing for benefits until age 70. Couples who can wait until then, can rack up those delayed retirement credits to receive the highest possible amount: 8% more in monthly payments for each year they delay (spousal benefits cap out at 50% at full retirement age regardless of retirement credits).
If both partners are wage earners, then if you can afford to, your best bet is to delay filing for retirement benefits until you both reach age 70.
Widowed spouses
Since the restricted application loophole does not apply to survivor benefits, widowed spouses are eligible for up to 100% of their spouse’s benefit at full retirement age, although in some cases they can collect earlier at a reduced amount.
If you’re a widowed spouse with your own retirement benefits, it can be worthwhile to start taking your spouse’s retirement benefits at full retirement age and delay your own benefits until age 70. By waiting, you can get the most out of those retirement funds.
Pro Tip
Don’t rely solely on collecting retirement benefits from Social Security. It’s important to practice retirement planning early on to ensure you can live a comfortable life after you quit working.
FAQ
When can a spouse draw from their partner’s Social Security?
If you have not worked or do not have enough Social Security credits (at least 40) to qualify for your own retirement benefits, you may be able to receive spousal benefits. To qualify for spousal benefits, you must be at least 62 years of age, or any age and taking care of a child entitled to receive benefits on your spouse’s record who is younger than age 16 or disabled.
Your full spousal benefit could be up to one-half the amount your spouse is entitled to receive at their full retirement age. If you choose to begin receiving spousal benefits before you reach full retirement age, your benefit amount will be permanently reduced.
Do same-sex couples have the same Social Security rights as “traditional” married couples?
The June 2015 Supreme Court decision in the case of Obergefell v. Hodges ruled that same-sex couples have a constitutional right to marry in all states. Thus, the Social Security Administration recognizes same-sex couples’ marriages in all states for the purposes of determining entitlement to Social Security retirement benefits.
This also encompasses some nonmarital legal relationships (such as civil unions and domestic partnerships) and entitles same-sex couples to the same Social Security benefits as any other married couple, including spousal benefits, disability benefits, and survivor benefits.
Key Takeaways
- Social Security retirement benefits used to include heavily exploited loopholes. Filers were claiming spousal benefits or the lower wage-earning spouse’s benefits while delaying or suspending their own benefits until well after full retirement age.
- The Bipartisan Budget Act closed those loopholes to prevent couples from engaging in unscrupulous practices to increase their benefits — specifically to receive spousal benefits or the other spouse’s benefits first.
- There are still a few sensible loopholes left in place that allow for an ex-spouse, a widow or widower, disabled individuals, or dependents to receive benefits independent of their own retirement benefit and prior to their own full retirement age.
- If you can afford it, the best way to fully maximize your retirement benefits from the Social Security Administration is to delay claiming benefits until you reach age 70.
While retirement benefits make a good safety net for later in life, you shouldn’t rely on them as your sole source of income after you stop working. To maintain a comfortable lifestyle at retirement age, you should also consider investing. Check out SuperMoney’s beginner’s guide to investing to get started, then use our comparison tools to find the best brokerages and investment advisors for you!
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