File and Suspend Changes and the Effects on Women

 December 14 2015     Anna Pfaehler
“Social Security was created in a time when many women did not work outside the home. To recognize the value of the work they did and create economic stability for women in old age, spousal benefits were created.”

I’ve said that line dozens of times when presenting to clients on Social Security. I try to balance genders in my examples but while a man can be the “spouse” and take benefits from a wife’s earning record, this is just not the typical fact pattern.

Historically, women have provided for their families in ways that do not incur FICA tax – raising children, volunteering in our communities and managing a household. 

Social Security retirement benefits are based on an average of 35 years of earnings. If a woman takes time out of the workforce, those years are factored in as 0s and reduce the average. In addition, those women who chose, or economically needed, to work have typically been compensated less than men. Unequal pay during a career translates to unequal benefits in retirement. 

Spousal benefits were meant to provide a safety-net for women who had stepped out of the workforce, never entered, or only worked part-time to balance other duties. Benefits are calculated as ½ of the primary worker’s benefit if taken at full retirement age (66-67). They are reduced if the spouse takes the benefit early. On the other hand, they do not increase after full retirement age, unlike workers’ benefits which increase 8% per year delayed up to age 70.

One key rule to claiming a spousal benefit is that the primary worker must file for benefits before a spousal benefit can be claimed. As the law stands today, the primary worker can file for then suspend payment of his own benefit allowing for the wife to take a spousal benefit and the primary benefit to continue growing until age 70.

From the wife’s perspective, this gives her an income of her own now. It also creates a broader safety-net for her after her husband’s passing (and statistically, us ladies will outlive the gents) because she will switch to his larger benefit as a survivor. 

The recently passed bipartisan budget will eliminate this strategy for future filers. Anyone who is already using this strategy, or begins to in the next 5 months, will be “grandfathered” under the old rules. After April 30, 2016 the primary spouse must be receiving benefits in order for any auxiliary benefit to be paid. How does this affect women?

1. The Rock - A women who has no benefit of her own must wait until her husband decides to receive Social Security to receive a spousal benefit. Previously, he needed to only have filed. If he wants to wait to take his benefit, she must do so as well. 

Remember, spousal benefits do not increase by waiting so she is not directly compensated for the delay like he is. If she has a benefit on her own record, she can receive that while waiting, but it might be less than she would receive as a spousal benefit. 

2. The Hard Place - To maximize survivor benefits, she would want her husband to wait to receive his benefit until 70. Additionally, the husband is incentivized to delay receipt of benefits to age 70 because his benefit will be up to 32% higher for the remainder of his life. 

Because of the history of women in and out of the workforce, the recent changes to file-and-suspend are going to directly impact women the most. The changes will eliminate a strategy that is complex, but in this simplification the decision of when to take benefits becomes more difficult for those relying on a spouse’s work record. 

Furthermore, execution of that decision falls in the hands of the husband. Under the new rules, if the wife wants a spousal benefit before her husband turns 70, he will have to leave some delayed retirement credits on the table. With file-and-suspend the husband is neutral, but now he is required to make a trade-off. 

Changes to ex-spousal benefits are an even bigger can of worms, but I’ll save that for another installment.