Committee for a Responsible Federal Budget
Social Security

Time to Close Two Social Security Loopholes

May 14, 2015 | Social Security

With the Social Security trust funds facing a significant shortfall over the next 75 years and expected to run out of money within 20 years, Alicia Munnell of the Center for Retirement Research at Boston College highlights two loopholes that could be closed to improve the program's solvency in a small but meaningful way.

Noting that creative ways to maximize Social Security benefits have been gaining popularity in recent years, Munnell focuses on two strategies to exploit loopholes she and her colleagues discussed in 2009 policy briefs, which have yet to be closed (the third loophole she highlighted has since been shut down through a new Social Security Administration regulation).

The first allows married beneficiaries reaching the normal retirement age (NRA, currently 66) to choose either to claim their own worker or spousal benefits (which is equal to one-half of your spouse's benefit), and the option to switch their choice later. This gives them the option of claiming a spousal benefit at age 66 and then switching over to their own unaffected retirement benefit when it maxes out at age 70, effectively giving the individual up to four years of the spousal benefit entirely on top of their own earned benefit. This loophole achieves no policy goal, and appears the result of a historical accident.

If you start claiming your Social Security benefits before the current NRA (66), the Social Security Administration (SSA) undertakes a process called "deeming," where it looks both at what your own benefit and spousal benefit would be, and awards whichever is higher. When SSA instituted delayed retirement credits that allow people to increase their monthly benefit by waiting as late as 70 to collect, they did not extend the deeming provision for people who start collecting their benefit between the NRA and age 70. Simply extending the deeming provision to those ages 66-70 would solve the problem and eliminate this loophole.

Munnell estimates that this loophole would cost Social Security $9.5 billion annually if everyone took maximum advantage of this strategy, although the actual cost is certainly significantly less (though not negligible).

The second strategy is known as "claim and suspend." It involves one spouse claiming and immediately suspending their benefits. The other spouse then claims their spousal benefits, while the original spouse continues to work, which increases both the worker and spousal benefits. This strategy has a potential annual cost of $1 billion. Munnell recommends closing this loophole by basing the spousal benefit on the originally claimed worker benefit rather than the suspended one.

Closing off these loopholes might only have a small impact, but with a significant shortfall to close, addressing these claiming strategies would be a good first step. To make Social Security solvent, though, lawmakers will need to bring benefits and revenue in line with the type of options in our Social Security Reformer.