Planning for retirement has never been easy, but changes to Social Security this year are making things all the more difficult.
Late last year, Congress passed and the president signed the Bipartisan Budget Act of 2015, a two-year budget deal which made the most significant changes to Social Security in nearly a decade. The goal of the changes was to remove certain claiming strategies that some say benefited high-income earners and to improve the overall funding status of Social Security. In the process, however, some Americans, especially those nearing retirement, lost a great deal of potential Social Security income.
Two popular Social Security claiming strategies were lost -- 1) “file and suspend” and 2) “restricting application”. Here’s what you need to know:
File and suspend
Basically, you can’t double dip.
Historically, some dual-earner married couples, age 66 or older, have been claiming Social Security benefits twice. First, they collected spousal payments worth half of the higher earner’s benefit amount, and then later switched to payments based on their own work record, which were then higher due to delayed claiming. It went like this: The higher earner would claim his benefit, thus enabling his lower-earning spouse to claim a spousal benefit (generally half of the higher earner's benefit). He would then immediately suspend his own benefit so that he could earn 8% a year in delayed retirement credits until he reapplied at (up to) age 70. In the meantime, his lower-earning spouse collected monthly spousal benefits. That is no longer allowed. People who turn 62 in 2016 or later will no longer be able to claim these two types of payments at different times, and the lower-earning spouse will no longer be able to claim a spousal benefit if the higher earner suspends his benefit.
The new law also will eliminate a beneficiary's ability to collect years of retroactive benefits. Under previous law, a person who suspended benefits was allowed to undo that decision later and claim a lump sum of retroactive benefits stretching back to the day the beneficiary filed his application. He would forgo delayed retirement credits, but would immediately collect three years’ worth of benefits retroactively. That is no longer possible.
Under previous law, if a person applied for benefits between 62 and full retirement age, the Social Security Administration "deemed" that he must take the highest benefit he was eligible for -- whether it was a retirement benefit or a spousal benefit. Once a beneficiary reached full retirement age, however, he could choose to restrict an application to spousal benefits only. That meant a higher earner could collect the spousal benefit while allowing his own benefit to accrue delayed credits.
The new law ends this option by extending the deeming rule to applicants of all ages. When someone applies for a benefit at any age, the Social Security Administration will automatically give the beneficiary the highest benefit. So a higher earner who applies at full retirement age will no longer be able to collect a spousal benefit if his own retirement benefit is higher. He'll have a choice: either collect his retirement benefit, or delay.
For years, many couples have engaged in both strategies at once, and the new laws surrounding Social Security will undoubtedly impact retirement planning going forward. Still, it’s not all doom and gloom. Claiming options are still available, so take advantage of them. Married individuals are still eligible to claim payments worth up to 50% of the higher earning spouse’s benefit, if that amount is higher than payments based on the lower earning spouse’s work record. And the survivor benefit remains unscathed; widows and widowers inherit their spouse’s benefit payment when it is higher than their existing benefit. And all workers also have the option to increase their monthly Social Security payments by delaying claiming them up until age 70. Patience is the greatest virtue when it comes to Social Security benefits.
With proper planning, you can make the new laws work for yourself. Work with your financial planner to redesign your retirement strategy in light of these changes.