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While most of us in the retirement planning arena are still digesting the full impact of the significant Social Security rule changes recently signed in to law, a few things are becoming clear. One of the strangest is an incentive for people to divorce as they approach their full retirement age. Let’s call this an “unintended” consequence since I cannot imagine the goal was to encourage divorce, but let me explain why this will happen unless the rules are adjusted.
Suspending One Suspends Both
A common technique in claiming SS retirement benefits has been to “restrict” your application to just a spousal benefit that is based on your spouse’s earnings record, and let your own benefit grow in the background until age 70 at which time you switch. This technique was an integral part of the “file and suspend” strategy since the only way you can file for a spousal benefit while married was to wait until your spouse had filed. To keep things easier to explain and follow let’s use names. Assume Mark and Sue are a married couple who both have earned a SS retirement benefit. In order to max out their monthly benefit they both wished to delay filing until age 70. Under the old SS rules Mark could “file and suspend” at 66, unlocking the door for Sue to file a restricted application for spousal benefits when she is 66. Sue then collects this spousal benefit while her own benefit grows to age 70. This technique is now unavailable to people unless they deploy it prior to May 1st, 2016. Under the new rules Sue cannot restrict her application to just a spousal benefit unless she turns 62 by December 31, 2015. But let’s assume she is older than that and actually CAN file a restricted application when she reaches 66. Unless she turns 66 prior the May 1st, 2016 deadline Mark will not be able to delay his benefits while allowing Sue to collect her spousal benefit. When Mark suspends it will also suspend Sue’s benefit. But what if they divorce?
Exception for Divorce
There is a special exception for divorced couples that allows a person to file for a spousal benefit even if their ex-spouse has not yet filed. And as long as they were married at least 10 years Mark and Sue are eligible for spousal benefits based on each other’s earnings history even if they divorce, but with one restriction. They must be divorced for at least 2 years to avoid having to wait for the ex- spouse to file. This creates a perverse incentive for those not yet 66 in May of 2016, but older than 62 by December 31, 2015 to divorce when they reach age 64. Let’s pretend Mark and Sue are each the same age, have been married 15 years and turn 62 on December 31, 2015. As long as they are divorced by December 31, 2017 when they turn 64 they will both be in a position to file a restricted application when they turn 66 entitling them to a spousal benefit (for each of them!) that they can collect until they reach age 70 when they can switch to their own, now 32% higher benefit, and then get re-married (if they so choose)!
So basically for those under age 66, but over age 62 by the end of this year, they have lost a certain strategy to claim that used to lessen the incentive to divorce, but since that strategy is gone for them the attractiveness of the “Divorce to Win” strategy has increased.
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