Financial advisors who push the Social Security split strategy could be putting their clients at risk of lower lifetime benefits, said economist Laurence Kotlikoff.
In the split-filing strategy, the lower-earning spouse would take their Social Security benefit as early as age 62, while the higher-earning spouse would wait until age 70 to maximize their benefits.
“It’s a risky strategy and to advise it is a pretty reckless thing to do,” Kotlikoff said, adding that advisors who are suggesting the split strategy must consider the mortality potential of the higher-earning spouse. “They really have to be thinking that this person is going to die with pretty good probability, because otherwise they are putting their [client] household at risk of a lower lifetime benefit."
Kotlikoff, also a professor of economics at Boston University and the author of Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life, spoke recently during a webinar sponsored by the Financial Experts Network. He explained that before May 2016, there was an option in the law that allowed one spouse to file for retirement benefits anywhere from age 62 to age 70 and the other spouse could file just for a spousal benefit. This also applied to divorced couples, where the ex could file for benefits if the marriage lasted 10 or more years and the divorce was for at least two years.
By filing just for spousal benefits, that spouse would let her assets grow until he or she reached age 70. Within that time, he or she also would gain the delayed retirement credits, which is an 8% per year increase in benefits between full retirement and age 70. “So, if we are talking about four years between 66 and 70, that’s 32% higher retirement benefit at 70,” Kotlikoff noted. “It’s kind of like free money in a sense.”
But that claiming strategy, known as “file and suspend,” was eliminated by the Bipartisan Budget Act of 2015. Kotlikoff noted that a lot of people in the policy world thought it was a giveaway for the rich. “And of course, some rich people were taking advantage of it, and it could produce a windfall for high earners of $50,000 or more. On the other hand, people have been working their entire lives, paying these benefits for their independence, so letting them get those benefits seems to me to have been a fair thing to do,” he said.
File and suspend, however, was grandfathered in for those born before January 1, 1954, Kotlikoff noted. So those over age 68 and a few weeks can still file just for the spousal benefits if they have not yet taken their retirement benefits and their spouse is already collecting benefits. The same goes for divorcées.
“If you’re not 68 and a couple weeks older and still under age 70, you really can’t play this game at all,” Kotlikoff said. “So if you file for your spousal benefits, you are also going to be forced to take your retirement benefit and vice versa,” he added, explaining that this is called “deeming.”
The other thing, Kotlikoff pointed out, is that if you took retirement benefits early, maybe at 62, and reach full retirement age and you want to suspend the benefit (which you are still allowed to do under the new rule), and started again at 70 taking the delayed retirement credits, you are not allowed to collect on another worker’s record, nor can another person collect on your record while your benefit is in suspension.
“So this new law is a nasty piece of work compared to what we had before,” he said.