As I explained in a memo to you two weeks ago, major changes have just come to Social Security, particularly to the claiming strategies many people have been talking about for the past few years. These changes came as a complete surprise to the entire industry, but they also create an opportunity to review your retirement income projections.
What Benefits Are and Are Not Available to You Now
On November 2, President Obama signed a new budget bill that included restrictions on the File & Suspend and Spousal Only Social Security filing strategies. This bill became law with no public hearings, nor was any specific Social Security legislation ever introduced. It was merely swept in as part of the big picture budget agreement.
The idea was to close some “unintended loopholes” under the old law. These are things that have been on the books for the past 15 years. How much difference will it make? According to The Wall Street Journal (Oct. 28, 2015), the Social Security Administration estimates that these rule changes will save less than 1 percent of the projected Social Security funding deficit. Why are we not surprised?
Here’s what you need to know:
File & Suspend: Changed, But Not Eliminated
Remember that your spouse can only collect a spousal benefit once you have filed for your own benefit. “File & Suspend” is a way to make your spouse eligible for a spousal benefit without actually collecting on their own earnings record. Basically, when you reach full retirement age (FRA) (let’s say, 66), you can go to Social Security and apply for and then suspend your personal benefit. Then your spouse could begin collecting a spousal benefit while you wait until age 70 and “max out” your own benefit.
Note that File & Suspend isn’t being eliminated; but after April 30, 2016, it can no longer be used to trigger a spousal benefit (or child’s benefit).
This deadline is one critical reason why you may want to review this right away if you’re close to full retirement age. The clock is ticking.
You might have heard that File & Suspend was eliminated completely by the new law and that anyone collecting a spousal benefit resulting from a file and suspend would lose it. Some of the initial reports indicated that this was the case, but it wasn’t intended to be that way. So, the budget deal has already been revised to grandfather in anyone already using this strategy or anyone who elects to do so in the next six months.
“Spousal Only:” Limited
Spousal Only allows someone who’s already at FRA (who hasn’t previously filed) to collect a benefit based only on their spouse’s work record, without affecting their own. In other words, someone age 66 could collect half of their spouse’s benefit until age 70 and then switch to their own maxed out benefit. The new rules state that spousal only will only be available to people turning 62 by Dec. 31, 2015.
So Spousal Only will no longer be available to anyone born in 1954 or later. Note that the phase-in on this change is longer than the new file and suspend rule. Remember that you can’t actually take advantage of spousal only until you reach FRA. If you are old enough, you can do it as soon as you turn 66. As a practical matter, this needs to be done by Dec. 31, 2019 or shortly thereafter. That’s the day the youngest eligible individuals will reach age FRA.
“Combination Strategy:” Phased Out
The Combination Strategy will become unavailable. This strategy is often used when two spouses are close in age. One spouse will file and suspend so that the other spouse can collect a spousal only benefit. You can still use this strategy, but only if the suspension occurs by April 30, 2016. After that, nobody else will be able to receive benefits on your work record until you actually start collecting, if at all.
“Deemed” Filing Rule: Changed
This rule was also changed. It says that if you apply for Social Security benefits before your FRA (age 66 for most), then you are “deemed” to have filed for anything and everything you are eligible for. You can’t pick and choose between personal and spousal benefits. With the exceptions listed above, the new rule states that the deemed filing rule now applies regardless of the age of you are when claiming retirement benefits.
“Start-Stop Strategy:” Still Available
This strategy is still available. Individuals often take advantage of this strategy when they realize after the fact that they’ve made a mistake. Let’s say someone chooses to start at 62. Doing so results in a reduced lifetime benefit. He still has the option to change his mind in the first 12 months. He would, of course, have to re-pay any benefits he’s already received.
But what happens after the 12-month payback option expires? He still has the option to suspend at 66, then restart at 70. Remember, the rules changes were designed to eliminate the use of file and suspend as a means of generating a spousal benefit. You still have the right to suspend if you wish to take advantage of the 8 percent per year deferred retirement credits (DRCs).
Example: Say you decide to retire at age 62, but decide a few years later that you have made a mistake. Let’s say your benefit at 66 would have been $2,000 per month, but because you started early, it’s reduced to 75%, or $1,500. You still have the option of stopping at 66, earning 8 percent per year for four years and then restarting at age 70. If you do the math, 75 % of 132 % equals 99%, so, you would be just about back to $2,000 per month. But, you would have to give up four years’ worth of benefits to get it. This is probably not very realistic for most people who needed the income at age 62.
“Lump Sum Refund:” Phased Out
This was a great story to tell, and one not many people knew about. When you file and suspend, you reserve the right to go back later and request a lump sum payment of the amount you deferred. For example, if you file and suspend a $2,000 per month benefit and change your mind a year later, you can get a check for the $24,000 you deferred. Your lifetime benefit, which would have been $2,160, would then be reduced back to $2,000 per month. This strategy is essentially a line of credit with the government. Unfortunately, it too will disappear on April 30, 2016.
So where does his leave us? Note that survivor benefits are completely unchanged. Just as before, it often makes sense for the spouse with the higher benefit to delay until age 70. That will result in a higher benefit as long as either spouse is still living. This could greatly increase the length of the higher payout.
These changes will certainly hurt some people, but as I said earlier, maybe it’s time to review your retirement income plan. We certainly welcome your comments and look forward to hearing from you.