What can a client do if he starts his Social Security benefit and later changes his mind? Say he goes back to work and no longer needs the income, or he has other sources of income to draw from and wants his Social Security benefit to build delayed credits to age 70.
Under the voluntary suspension rules, he can ask to have his benefit suspended starting at full retirement age (FRA). Let’s say Bill’s primary insurance amount (PIA) is $2,800. He had claimed his benefit at age 62, so his benefit was reduced to $2,100 per month. When he turns 66, he suspends his benefit and receives zero Social Security income from age 66 to 70. When he turns 70 his benefit is automatically resumed at $2,772 ($2,100 x 1.32) plus whatever cost-of-living adjustments (COLAs) have accumulated since age 62. Note that the delayed credits are applied to the benefit amount at the time of suspension, whatever that may be.
The voluntary suspension rules were created as part of the Senior Citizens’ Freedom to Work Act of 2000. Prior to this act, the earnings test applied to everyone under 70 who received Social Security and worked. Realizing that this was discouraging people from working, the law was changed to have the earnings test apply only to people under FRA. At the same time, it was acknowledged that people over FRA who worked, even though their benefit would not be withheld for the earnings test, might want to suspend their benefit so that it could build delayed credits to age 70. Suspending benefits at FRA is seen as a legitimate way to maximize one’s Social Security benefit through the accumulation of delayed credits.
What was not seen as legitimate was the file-and-suspend strategy that arose from this law. This loophole has since been closed. A high-earning spouse who had reached FRA and had planned to delay his benefit to age 70, but who didn’t want his spouse to have to wait until then to claim her spousal benefit, could file for his benefit and then immediately suspend it. This allowed the spouse to start the spousal benefit four years earlier and also allowed the worker-spouse to build delayed credits.
Since this strategy was being used primarily by wealthy people and seemed to be an abuse of the rules, it was disallowed as of April 30, 2016, as part of the Budget Act of 2015. Spousal benefits can no longer be paid on a record that was suspended after April 29, 2016. This effectively put an end to the popular file-and-suspend strategy. (The restricted application strategy is still alive and well for those born before January 2, 1954, providing the person had not previously applied for benefits. This allows the person to receive spousal benefits while their own benefit builds delayed credits.)
It should be noted that if a client suspended prior to April 30, 2016—an action many advisors told their clients to take after the Budget Act passed in November of 2015—spousal benefits may be paid, even if claimed after April 30, 2016. For example, let’s say Jack filed and suspended prior to April 30, 2016 but at the time Jill was not yet eligible for a spousal benefit because she was under 62. Once she becomes eligible she can claim her spousal benefit even though Jack’s benefit remains in suspension. That’s because he suspended before April 30, 2016.
Keep this rule about auxiliary benefits in mind when you are advising clients on suspensions. It may appear to be a good strategy for someone who has already filed and then realized, after talking to you, that suspending from FRA to age 70 would generate higher lifetime benefits. If a family member such as a spouse or dependent child is drawing off that person’s record, their benefits will also be suspended. An exception is divorced-spouse benefits. If Jack suspends his benefit, his current wife Jill will have her spousal benefit suspended as well, but his ex-wife Jane may continue to receive her divorced-spouse benefit.
There is no form to sign or formal process to suspend. SSA says, “you may ask us orally or in writing.” Once suspended, benefits will automatically resume at age 70. If a client wants benefits to start sooner than that, he would again tell SSA “orally or in writing” that he wants his benefit to resume.
Disability-turned-retirement benefits can be suspended. A person receiving disability benefits will, at FRA, have their disability benefit converted to a retirement benefit. The amount will not change. The only difference is that the money is coming out of the OAS trust fund instead of the DI fund. Once it converts, it is a regular retirement benefit and can be suspended like any other retirement benefit. The fact that it was converted from a disability benefit does not impair the ability to suspend.
Suspension vs. withdrawal
When a benefit is suspended, the person’s record remains open. This puts certain restrictions on what he can do. For example, a person cannot suspend his benefit and then file a restricted application for spousal benefits—a common question from clients who learn about spousal benefits only after they have applied for their own retirement benefit and are disappointed to learn that they cannot take advantage of the claim-now-claim-more later strategy.
A person cannot receive benefits on another person’s record while their benefit is in suspension. Let’s say you have a widow who received poor guidance or got a sloppy SSA worker who took an application for her own retirement benefit. After talking to you, the widow realizes that if she had taken her survivor benefit instead of her retirement benefit (i.e., filed a restricted application for her survivor benefit), she could have let her own benefit build delayed credits to age 70.
She asks if she can stop (i.e., suspend) the retirement benefit and receive her survivor benefit in the meantime. The answer is no. If she had suspended prior to April 30, 2016, she could have received the survivor benefit while her benefit was in suspension. But if she suspended after that date, the new rules say that she cannot receive her survivor benefit while her retirement benefit is in suspension.
To close the record and go back to the way it was, as if she had never applied, she would need to withdraw her application and repay any benefits she had received. This must be done within the first 12 months of application. Once the 12 months have passed, withdrawal is no longer an option. So if you encounter someone who applied for benefits less than 12 months prior and is eligible for the restricted application strategy (i.e., was born before Jan. 2, 1954), you can recommend that they withdraw their application, repay their benefits and reapply with a restricted application.
Note that if auxiliary benefits are being paid off that record, such as a spousal benefit, that person must consent to the withdrawal (divorced-spouse benefits excepted). Only one withdrawal can be done in a lifetime; withdrawals prior to adjudication (i.e., before the application has been processed) don’t count toward this once-in-a-lifetime limitation.
This restriction on withdrawals to the first 12 months after application became effective December 8, 2010, and was one of the first loopholes to close. Prior to that, enterprising (and well-off) people would apply for Social Security benefits at 62, have the use of the money for eight years, and then withdraw their application at age 70, repay benefits without interest, and keep the investment earnings generated by the invested benefits. Questions still come up occasionally about this long-closed loophole.
‘Suspending’ before FRA
It is not possible to initiate a voluntary suspension before FRA. So what happens if your laid-off client applies for benefits at 62 and six months later gets a job? In this case his benefit will be withheld for the earnings test—$1 in benefits will be withheld for every $2 he earns over $17,640—which could have the same effect as a suspension. If all benefits are withheld, his benefit will be recomputed at FRA to remove the actuarial reduction for all those months he did not receive a check—equivalent to delaying benefits for those months—and his benefit at FRA will resume in an amount very close to his PIA (minus only the reduction for those months he did receive a check). At that point he can voluntarily suspend his benefit and build delayed credits to age 70.
Our Savvy Social Security Planning calculators have all these rules programmed into them. You will often see that the Maximum Benefit strategy for a client who claimed before FRA is to suspend the benefit at FRA to build four years of delayed credits. Clients who are used to the income may have a hard time accepting zero benefits for four years while their benefit grows, but the calculator clearly shows that this is a worthwhile strategy, usually leading to higher lifetime benefits.
References and further reading