In the most significant reform to Social Security since 1983, the 2015 federal budget act includes sweeping changes to Social Security that take away a number of creative strategies that previously allowed married couples to realize larger lifetime benefits.
The projected long-term savings for the government from these changes are in the ballpark of $168 billion and served as motivation for the House, Senate, and the President to sign off on the legislation. As these strategies were seen as primarily benefitting wealthier American couples who had no immediate need for benefits in retirement, the new legislation was seen as a “fix” to an unintended windfall for affluent married Social Security beneficiaries.
What was so surprising was the speed with which the changes took place. Normally, legislative decisions that affect millions of Americans are hammered out over a number of years. These changes were decided upon in a matter of weeks, as part of a deal to pay for an increase in federal spending caps. Republicans and Democrats alike felt that “closing loopholes” in Social Security benefits presented the least painful way to cut federal spending.
When the smoke cleared following the President’s expedited signing of the bill on November 2nd, it became apparent that there are, as always happens with change, winners and losers in the new Social Security benefits world:
Winners
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Widows (widowers) benefits are unaffected by the new law.
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Those who will be 66 or older by the April 30, 2016 deadline to file will retain the right to suspend Social Security benefits under existing rules.
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Those who are 62 or older by the end of 2015 will retain the right to claim “spousal benefits” only when they turn 66.
Losers
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Everyone (except widows and widowers) who turns 63 after January 1, 2016.
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Those who turn 66 shortly after the May 1, 2016 deadline.
In order to understand why Social Security timing strategies have been so valuable in the past, one must fully understand the unique Social Security Administration terminology:
FILE AND SUSPEND
A “file and suspend” strategy allows a wage earner who is full retirement age or older to file for Social Security benefits and then immediately suspend them. In the meantime, it allows a spouse or minor dependent child to collect “auxiliary” benefits worth up to half of the parent or spouse's full retirement age (starting at age 66 for retirees born before 1955 and maxing out at 67 for retirees born after 1959) benefit amount, while the wage earner's benefits continue to grow by 8% plus inflation per year, up to age 70.
In addition to triggering family benefits, the file and suspend strategy also permits a wage earner to change his or her mind any time before age 70 and request a lump sum payment of all the suspended benefits instead of collecting delayed retirement credits. This has been a particularly valuable strategy for unmarried individuals who experience a change in health or financial condition.
But beginning May 1, 2016, requests to file and suspend benefits will operate under a new set of rules. No family members will be able to claim benefits during the suspension period, and the lump sum payout of suspended benefits will no longer be available.
LIMITED USE OF FILE AND SUSPEND
In the future, the only use of the file and suspend strategy will be for those people who both claimed reduced benefits early and who want to increase their future benefits. By suspending their benefits at their full retirement age or later, it will allow them to earn “delayed retirement credits” of 8% plus inflation per year, up to age 70 — increasing not only their retirement benefits but the potential survivor benefit for the spouse they may leave behind.
RESTRICTED BENEFITS
Restricted applications for benefits, sometimes referred to as “spousal” benefits, are used by individuals at full retirement age to take a current benefit from their spouse (50% of the spouse’s benefit), while allowing their own retirement benefit to grow by 8% a year plus inflation, until age 70. At no later than 70, they will request that their own benefits be paid at the new, higher amount.
Spousal benefits can also be paid out prior to full retirement age; however, those benefits will only be paid out if they exceed the benefits due to the individual on their own work record.
Beginning May 1
, 2016, requests to restrict one’s benefit to only spousal benefits will be dependent upon whether one was born before January 2, 1954 and whether one’s spouse has actually begun to take their own retirement benefits. Current law allows the “primary” spouse to file and suspend (in order to receive a higher payout later) their own benefits while their spouse takes a restricted benefit. This will no longer be possible after May 1.
THE BOTTOM LINE
While the new Social Security benefits rules are complicated and unique to each individual and couple’s situation, your McKinley Carter advisor can help you select the best claiming strategy for your particular needs. As part of our analysis of the best timing and method to employ to begin receiving your hard-earned retirement benefits, we take into consideration all of the relevant financial factors in your life in order to make a prudent, well-thought-out recommendation. Please contact us with any questions that you may have regarding these upcoming rule changes.