06 Nov 2015 New Budget Deal Affects Social Security Strategies
First the good news: the House and Senate passed a new budget deal last week that suspends the debt limit until 2017 and increases funding levels for a number of federal programs. President Obama signed the deal into law on Monday, avoiding a government debt default and reducing the risk of a government shutdown in December.
Now the bad news: Section 813 of the new bill, the Bipartisan Budget Act of 2015, includes provisions that may cut into Social Security benefits for millions of Americans. The bill will prevent retirees from using two advanced Social Security claiming strategies known as “file and suspend” and “filing a restricted claim for spousal benefits.” Together, these strategies allow retires to increase their lifetime Social Security benefits by as much as $50,000.
How Did “File and Suspend” and “Restricted Claims” Originally Work?
The rules for claiming Social Security are incredibly complex, and a law passed in 2000–the Senior Citizens’ Freedom to Work Act–made them even more complicated in part by creating what were called “voluntary suspension” rules. However, these rules, in concert with the advent of a “restricted application,” afforded some planning opportunities, especially for married couples.
What were those opportunities? Well, when thinking about Social Security benefits, the general rule to remember is that the longer you wait to start receiving your Social Security check, the higher your monthly benefit will be. For example, the monthly check for a single person who files at age 70 can be as much as 76 percent higher than if she had filed early at 62.
That being said, in a strategy that employed the voluntary suspension rules and the restricted application, waiting was not an “all or nothing” proposition. In a scenario where two married workers were each individually eligible for Social Security benefits, this strategy allowed for the spouse with the higher earnings record to file for Social Security at their full retirement age (around age 66) and then immediately suspend their benefits as part of the voluntary suspension rules (thus “file and suspend”). As a result, their benefit could continue growing, potentially to age 70. In addition–and this was the real opportunity of the strategy–the fact that they had filed for their benefit meant that the spouse with the lesser earnings record became eligible at their own full retirement age to “file a restricted claim for spousal benefits.” At that point they could begin receiving a Social Security benefit based on their spouse’s record (the one who filed and suspended) while their own continued to grow potentially until their age 70. In other words, the value of that strategy was that it created a situation where both spouses’ Social Security benefits could grow to their maximum amount at age 70, while one spouse began receiving a Social Security check around the age of 66 that amounted to roughly half of the other spouse’s benefit.
In the case of a married couple where only one spouse was individually eligible for Social Security, the file and suspend strategy worked the same way, except there was no need for a “restricted application.” The eligible spouse would simply file and suspend, thereby allowing the non-eligible spouse to start receiving their spousal benefit earlier.
How Does the New Budget Impact These Strategies?
Here’s what we know so far about the potential changes:
- As of May 1, 2016, spousal benefits will no longer be payable unless the primary earner is also collecting Social Security benefits, thus effectively ending the file and suspend strategy for married couples and families with dependent and/or disabled children.
- However, retirees who will be age 66 or older before May 1, 2016 may still have time to file and suspend and trigger benefits for their spouse or dependents.
- Most spouses will also no longer be able to file restricted claims for spousal benefits at their full retirement age.
- However, retirees who will be age 62 or older by December 31, 2015 may still be able to file a restricted application for spousal benefits.
- Workers and spouses who are currently using these strategies (e.g. have already filed and suspended claims) are grandfathered in under the deal and will not be affected.
Who Might Need to Take Action?
Married couples and divorced spouses who are 66 or older now, or who’ll be 66 before May, 1st 2016 when the new rules kick in, should take a really close look at their potential benefits and decide whether it makes sense to pursue the file and suspend and restricted application approach.
Irrespective of this new development, Social Security remains a complicated facet of financial planning. If you’re over the age of 60 and have yet to get a careful analysis of your potential benefits and optimal claiming decisions, please give us a call and let us know how we can help.
As always, we will stay on top of things as they progress. In the meantime, please let us know if you have any questions or concerns about what this might mean for you.