Congress just changed the Social Security benefit rules. On October 30, Capitol Hill lawmakers approved a two-year federal budget deal. As part of that agreement, they authorized the most significant change to Social Security policy seen in this century, disallowing two popular strategies people have used to try and maximize retirement benefits.1
The file-and-suspend claiming strategy will soon be eliminated for married
couples. It will be phased out within six months after the budget bill is
signed into law by President Obama. The restricted application claiming tactic
that has been so useful for divorcees will also sunset.2
This is aggravating news for people who have structured their retirement plans – and the very timing of their
retirements – around these strategies.
Until the phase-out period ends, couples
can still file and suspend. The
bottom line here is simply stated: if you
have reached full retirement age (FRA) or will reach FRA in the next six
months, your chance to file and suspend for full spousal benefits disappears in
Spring of 2016.3
Spouses and children who currently get Social Security benefits based
on the work record of a husband, wife, or parent who filed-and-suspended will
still be able to receive those benefits.3
How exactly did the new federal budget deal
get rid of these two claiming strategies? It made substantial revisions to Social Security’s rulebook.
One, “deemed filing” will only be allowed
after an individual’s full retirement age. Previously, it only applied before
a person reached FRA. That
effectively removes the restricted application claiming strategy, in which an
individual could file for spousal benefits only at FRA while their own
retirement benefit kept increasing.2
The restricted application claiming strategy will not disappear for
everyone, however, because the language of the budget bill allows some seniors
grandfather rights. Individuals who will be 62 or older as of December 31, 2015
will still have the option to file a restricted application for spousal
benefits when they reach Full Retirement Age (FRA) during the next four years.2
Widows and widowers can breathe a sigh of relief here, because deemed
filing has no bearing on Social Security survivor benefits. A widowed person
may still file a restricted application for survivor benefits while their own
benefit accumulates delayed retirement credits.2
Two, the file-and-suspend option will soon
only apply for individuals. A person will
still be allowed to file for Social Security benefits and voluntarily suspend them
to amass delayed retirement credits until age 70. This was actually the
original definition of file-and-suspend.2
Married couples commonly use the file-and-suspend approach like so: the
higher-earning spouse files for Social Security benefits at FRA, then suspends
them, allowing the lower-earning spouse to take spousal benefits at his or her
FRA while the higher-earning spouse stays in the workforce until 70. When the
higher-earning spouse turns 70, he/she claims Social Security benefits made
larger by delayed retirement credits while the other spouse trades spousal
benefits for his/her own retirement benefits.4
No more. The new law says that beginning six months from now, no one
may receive benefits based on anyone else’s work history while their own benefits
are suspended. In addition, no one may “unsuspend” their suspended Social
Security benefits to get a lump sum payment.2
To some lawmakers, file-and-suspend
amounted to exploiting a loophole.
Retirees disagreed, and a kind of cottage industry evolved around the strategy
with articles, books, and seminars showing seniors how to generate larger
retirement benefits. It was too good to last, perhaps. The White House has
wanted to end the file-and-suspend option since 2014, when even Alicia Munnell,
the director of the Center for Retirement Research at Boston College, wrote
that “eliminating this option is an easy call ... when to claim Social Security
shouldn’t be a question of gamesmanship for those with the resources to figure
out clever claiming strategies.”4
Gamesmanship or not, the employment of those strategies could make a
significant financial difference for spouses. Lawrence Kotlikoff, the economist
and PBS NewsHour columnist who has
been a huge advocate of file-and-suspend, estimates that their absence could
cause a middle-class retired couple to leave as much as $70,000 in Social
Security income on the table.3
What should you do now? If you have been counting on using file-and-suspend or
a restricted application strategy, it is time to review and maybe even reassess
your retirement plan. Talk with a financial professional to discern how this
affects your retirement planning picture.
This material was prepared by MarketingPro,
Inc., and does not necessarily represent the views of the presenting party, nor
their affiliates. This information has been derived from sources believed to be
accurate. Please note - investing involves risk, and past performance is no
guarantee of future results. The publisher is not engaged in rendering legal,
accounting or other professional services. If assistance is needed, the reader
is advised to engage the services of a competent professional. This information
should not be construed as investment, tax or legal advice and may not be
relied on for the purpose of avoiding any Federal tax penalty. This is neither
a solicitation nor recommendation to purchase or sell any investment or
insurance product or service, and should not be relied upon as such. All
indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 - thehill.com/blogs/floor-action/senate/258629-senate-approves-budget-deal-in-overnight-vote
[10/30/15]
2 - marketwatch.com/story/key-social-security-strategies-hit-by-budget-deal-2015-10-30
[11/2/15]
3 - pbs.org/newshour/making-sense/column-congress-pulling-rug-peoples-retirement-decisions/
[11/1/15]
4 - slate.com/articles/double_x/doublex/2015/10/budget_deal_closed_social_security_loophole_known_as_file_and_suspend.html
[10/30/15]