We have written before about the need to reform Social Security in order to keep it solvent. It was pretty safe to assume that any changes would be unpopular. However, I never envisioned that it would happen like this. Just to be clear, the changes that were included in the “Bipartisan Budget Act of 2015” will not fix Social Security’s problems, but they will save a few billion dollars per year. The legislation, which was passed by the House and Senate last week, eliminated the file-and-suspend and restricted application claiming strategies. Say what? Yep. This is a game changer for many folks who plan to retire in the next few years as well as their financial advisors (like me) who will need to rework a lot of plans.
“File and Suspend” strategy – Eliminated:
Let’s review – Since the Freedom to Work Act was passed by Bill Clinton in 2000, a married couple had some attractive options in terms of how they coordinated their Social Security retirement benefits. One spouse (say the husband) could file for benefits and immediately suspend them in order to allow the other spouse (the wife in our example) to collect a spousal benefit on the husband’s work record. The husband’s future benefits would increase 8% per year while they were suspended (from his Full Retirement Age through age 70). This new legislation eliminates that option. The husband can still delay collecting benefits to age 70, with the corresponding increase, but his wife would not be able to collect a spousal benefit on his record until he actually starts collecting.
“Restricted Application” – Eliminated:
The other strategy that was eliminated was known as filing a restricted application. Using the example above, suppose that the wife filed for Social Security benefits based on her own work record and the husband claimed a spousal benefit (half of his wife’s benefit at her Full Retirement Age). The husband’s own Social Security benefit would continue to increase at 8% per year, and he would later switch to his own benefit (at age 70). Many people thought this sounded too good to be true, collecting a spousal benefit while your own benefit continued to grow. It was not too good to be true until now. Both of these claiming strategies (file and suspend & restricted applications) were viewed as loopholes that disproportionately benefited wealthier couples. Well, the “loophole” has now been closed. Social Security recipients will automatically get the larger of the spousal benefit or the benefit based on their own record. They cannot choose the smaller one and later switch to the larger one.
People can still choose to suspend their benefits until age 70 and get the 8% annual increase (known as Delayed Retirement Credits), but they cannot collect any spousal benefits during this time, and no one else can collect the spousal benefit on their work record (except ex-spouses, who were previously married at least ten years and divorced for at least two).
Timing – 3 Important Things to Know:
- Anyone who has already implemented one of the strategies above will be unaffected by the change. You are grandfathered. Yay!
- If you are 62 or older by the end of 2015, you can still file a restricted application any time prior to age 66.
- Workers who will be 66 by May 1, 2016 can still file and suspend before that date so that their spouse can collect a spousal benefit while their own benefit continues to increase. Younger workers will not have that option.
Usually, changes to Social Security occur over a period of years. This time it happened under the radar in a couple of days of closed-door budget negotiations.
It appears that Social Security survivor benefits will still be eligible for claiming separate from retirement benefits, allowing widows/widowers still to optimize the timing of when to start each.
I will be reviewing clients’ financial plans to see what changes are necessary and appropriate. However, feel free to contact me with any questions relating to your personal situation.