Re-Engineering Our Social Security Claiming Strategies

How ‘Freedom to Work’ opened the door to greater choice for those who want to keep working

by John Lensi, CLU, ChFC, REBC, RHU, CMFC, LLIF

Mr. Lensi is Vice President, Sales – Impact Technologies Group, Inc., Charlote, NC. Connect with him by e-mail:

A wonderful thing happened to the Social Security system in 2000. On March 28th of that year, by a vote of 416 – 0, the House of Representatives approved the “Senior Citizens’ Freedom to Work Act”. Congress then sent the bill to President Clinton for his signature. He signed the bill into law on April 7, 2000 resulting in three new driving forces for a better Social Security system for millions of Americans.

First, let’s put things into perspective. Today, in 2013, it is hard to imagine a time when the U.S. House of Representatives could approve anything by a 416 -0 vote. What could have possibly persuaded the U.S. Congress to make this sweeping, bi-partisan decision? The answer is clear. Why would the U.S. Government want to punish people who want to continue working past their full retirement age by reducing their Social Security benefits?

The presence of an earnings test made no political sense to the growing number of people who wanted to continue working, but faced steep cuts in their benefits if they did. This bill put an end to the retirement earnings test when a Social Security participant reached full-retirement age. When the bill was signed into law, the Social Security Administration’s definition of full-retirement age was age 65. Today, for people born between 1943 and 1954, their full retirement age is 66. For people born after 1960, their full retirement age is 67. For people born between 1955 and 1959, there is a gradual 2-month per year increase in the definition of full-retirement age.

Second, in addition to ending the earnings test, the bill also provided the right for a person to receive delayed retirement credits if the participant elected to take benefits after their full-retirement age. For most people today, these delayed retirement credits are 8% per year. Therefore, if you delay taking retirement benefits for four years (age 66 to age 70), you can expect to get 32% more at age 70 than at age 66. In addition, any annual cost of living adjustments (COLA) declared would increase your monthly payments even higher (COLA average since the year 2000 has been 2.5%).

Third, the Senior Citizens’ Freedom to Work Act introduced the claiming concepts of ‘file-and-suspend’ and ‘file-and-restrict’. These new provisions provide great flexibility for married couples in building complementary filing strategies. When all of the filing combinations are considered, a married couple, turning age 62, has well over 500 different age and filing combinations available to them. Further, with these new changes, divorced people (married at least 10-years) also now have filing strategies that add complexity and often additional benefit payments to their retirement planning.

What a Difference 8 Years Can Make

Perhaps it was the bull market or the year-after-year increase in general real estate prices back then. Or maybe it was simply the comfort of the general euphoria of a booming economy. Maybe “full-employment” quietly lulled people into believing that guaranteed, lifetime income benefits, in the form of Social Security payments, were not all that important to pay attention too. There was a growing sense that we were all going to be able to retire in our early 60’s with plenty of cash and fully-funded retirement plans and social security retirement benefits weren’t ‘all that important’.

Welcome to the great recession commencing back in 2008. Huge reductions in real estate values and the major collapse of the equities market and soaring unemployment caused people to scramble for ways to build income floors or guarantees under their plans for retirement. What better floor than one guaranteed by the Federal Government?

What could have possibly persuaded the U.S. Congress to make this sweeping, bi-partisan decision? The answer is clear. Why would the U.S. Government want to punish people who want to continue working past their full retirement age by reducing their Social Security benefits?

Almost overnight, Social Security planning became one of the hottest topics in the financial media. Like the ancient phoenix rising from the ashes, Social Security planning dominated the “in” discussions of the day. Prior to 2007, it was relatively hard to find informational articles and informed commentaries about creative ways to take Social Security payments that would maximize benefits. In the turmoil of the recession, people who thought they could retire at 62 or 63 found that they had to continue working well past their full-retirement age. Working longer was the only reasonable way to restore eroded benefits in their 401(k) plans, pay down debts on large mortgage balances and recover from pay cuts and corporate reorganizations (layoffs). In the new world of economic reality, the changes that were made to the Social Security system in 2000 suddenly became instantly more important and incredibly relevant! The removal of the earnings test meant that benefits were not reduced if you kept working past age 66 or 67. The creative filing strategies, available under the new rules, became some of the hottest topics of the day.

Smart Technology & Knowledgeable Advisors Plan with Clients

The financial service industry and the clients they serve have to thank smart computer programmers and knowledgeable financial advisors. Working together, these wizards made the complex rules, introduced thirteen years ago, much more understandable. As a result, unconventional filing strategies like ‘file-and-suspend’ and ‘file-and-restrict’ became more conventional. The importance of delayed retirement credits, spousal benefits and non-covered pension benefit offsets are now part of the retirement-planning vocabulary. They are no longer obscure parts of a legislative initiative dating back to the year 2000.

The financial services industry should also thank the Boston College academic team of Alicia Munnell, Alex Golub-Sass and Nadia Karamcheva for their outstanding research, funded by a grant from the Social Security Administration in 2009. A copy of their paper, Understanding Unusual Social Security Claiming Strategies,” is available on the Boston College Center for Retirement Research web site.  In addition to a very detailed review of the creative filing strategies, the authors provide an estimate of what these strategies would cost the Social Security Trust Fund if they are generally followed by married couples trying to maximize their retirement benefits.

In their study the author’s state:
“We estimate the potential cost of allowing couples the option of “claim and suspend” to be about $0.5 billion dollars a year, while that of “claim now, claim more later” to be around $10 billion a year. It is possible that policymakers may evaluate these strategies as they look to trim expenses by reducing cost increasing provisions to ensure they are consistent with the basic goals of the Social Security program.”

The quote from this research paper directly correlates to the title of this article that the Senior Citizen Freedom to Work Act of 2000 opened a window of opportunity. This window for ‘leveraged’ retirement income planning is available to advisors and their clients right now. It may not be available later if the political winds in Washington suddenly blow in a different direction as history has often demonstrated. This window could slam shut, so the time to act is now as eventually Congress will look to ways to ‘firm up’ the financial well-being of the Social Security Trust Fund.

Advisors should have the urgency and responsibility to understand how the now current allowable claiming strategies can be managed in their clients’ best interests as most likely should changes occur, most likely they will be grand-fathered. Thankfully, technology tools are currently available to make this process of analyzing optimum claiming strategies easy. Advisor knowledge and smart software tools can combine to truly leverage this open window of opportunity to the benefit of the client (and advisors) now. It is hard to imagine this window opportunity will be open forever.