Social Security loophole closed, but couples still have options to maximize benefits

The Social Security "file-ocalypse" came and went, and the system is still standing. Workers are claiming benefits and the Social Security Administration still is making payments.

The big event? The closing of a legal loophole last month that permitted married couples to game the system of spousal retirement benefits through joint claiming strategies. So-called file and suspend and restricted claims were worth around $35,000 to $60,000 in extra lifetime benefits.

You would have been forgiven for thinking the world was coming to an end. Enraged near-retirees and media commentators attacked Congress, President Obama, and even possibly the ghost of Franklin D. Roosevelt.

But the loophole never made any sense.

Created inadvertently with passage of the Senior Citizens Freedom to Work Act in 2000, it allowed one spouse to file for benefits and then suspend payments, while the other claimed a spousal benefit. Both then waited to file for their own benefit, earning valuable delayed credits.

What is left for married couples aiming to maximize their benefits, now that file-and-suspend has faded into the sunset?

As it turns out — plenty.

Married couples should always consider Social Security as a coordinated exercise aimed at maximizing their lifetime household benefits, and they should consider a range of options. Should one or the other spouse start benefits early, should both delay or should both file early?

Most often, couples will benefit if the higher-benefit spouse delays filing to earn delayed credits.

Social Security's filing rules are designed to be actuarially "fair," which means the credits for delayed filing (and penalties for early filing) should give us all roughly the same lifetime income — at least, according to the actuarial tables. You receive about 8 percent less for every year you file early (starting at age 62), and the same increase for every year you wait until age 70 — the last year for which additional credits are available.

Higher-income people tend to live longer, so they stand to benefit from delayed filing.

"It pays to run the numbers illustrating one spouse starting benefits as early as possible while the other person waits as long as possible — usually the higher earner," said Jim Blankenship, a financial planner based in New Berlin, Ill., and author of "A Social Security Owner's Manual."

"The idea is to get some income coming in early but also look at the cumulative lifetime cash flow," he said.

If you need help running the numbers, check out a free online tool offered by Financial Engines, a big advisory firm for 401(k) plans (bit.ly/1lEeahk).

The Social Security Administration has a free downloadable tool (1.usa.gov/1OcZiWX), and Social Security Solutions offers a solid solution for a small fee (bit.ly/1rSd3pP).

Here is an example created using the Financial Engines tool.

Mike was born in December 1956 and has reason to think he will have average life expectancy (living to about age 86). Ann was born in October 1958, and can expect a greater-than-average life span (around 91). He earns $140,000 per year; she earns $80,000.

If they both file at the full retirement age (66), he will receive an initial benefit of $33,700 per year. She will get $27,800. Their expected lifetime benefit is $1,473,500.

How could they boost those numbers? If Ann files for her earned benefit at age 67, and Mike files at age 70, they will receive $149,000 more in lifetime benefits.

In situations where one spouse's income is much lower — less than half of his or her mate's — Blankenship suggests that the lower earner file at 62 (the earliest claiming age). At a later point, when the higher-benefit spouse files, the lower earner could be entitled to an increase from a spousal credit.

The Social Security Administration typically would bump up his or her payments automatically when the spouse files, although Blankenship advises contacting the SSA to make sure it happens.

Blankenship also advises couples to think about maximizing monthly benefits for the spouse most likely to live longest.

Even fairly affluent households can run out of savings at advanced ages.

For a widow in her 90s in that situation, a maximized Social Security benefit, adjusted annually for inflation, can be a real lifesaver. In Mike and Ann's case, for example, her income as a widow would be $10,900 higher.

"The key is to have a lifetime strategy as a couple," Blankenship said. "Don't just say to yourself, 'This is my benefit — I want it right now because I've worked long and hard for it.' "

Mark Miller is a columnist for Reuters.