Social Security Changes the Rules

Hot off the press – Congress finally enacts radical changes to Social Security. Granny and her wheelchair didn’t get pushed off the cliff and AARP didn’t howl with rage that their members will soon be eating cat food. In fact, the lack of reaction is more surprising to me than the swift kick in the teeth to near-retirees who have lost thousands of dollars of potential benefits. What happened and what
does (or may) it mean for you?

We’ll start at the beginning. In 2000, the Senior Citizens Freedom to Work Act launched a new option for Social Security recipients: they could file for benefits and then suspend receipt of them. Because the “secondary” spouse cannot file for spousal benefits until the “primary” spouse files, “file and suspend” gave couples a triple opportunity:

  • The primary spouse could File-and-Suspend so the secondary spouse could begin receiving spousal benefits of ½ the primary spouse’s benefit amount;
  • Future benefits (suspended by the primary spouse) would grow by 8% annually, and
  • The primary spouse was allowed to change his/her mind at any time between Full Retirement Age (FRA) and age 70 and request a lump-sum check for accrued back benefits. This was particularly helpful when it was determined the spouse might not live long enough to “break even” on deferring benefits (a terminal diagnosis, for example).

And in the case of 2-income households, the secondary spouse also had the opportunity to file a “Restricted Application”. This meant the secondary spouse could file for spousal benefits while allowing his/her own benefits to grow.

The problem was, most people of retirement age were unaware of the opportunity to suspend benefits and/or simply wanted to collect as much as possible as soon as possible. Therefore, those who profited most from the File-and-Suspend and Restricted Application techniques were couples who had access either to good financial planning or to CPAs who educated them about the opportunities to increase lifetime income. In other words, higher-earning families, such as the readers of this column. Here’s what you need to know about the new rules:

  • If you are already using File-and-Suspend, you are not affected by the budget changes.
  • Congress gave us a 6-month extension on File-and-Suspend. If you are age 65.5 or older as of 10/29/15, you have until 4/29/16 to file and suspend. After 4/29/16, you are permanently cut off from this option. If you decide to file and suspend by 4/29/16, you will also continue to qualify to receive lump-sum suspended benefits in lieu of delayed retirement credits if you change your mind.
  • Those wishing to file a Restricted Application have a little more time. If you reach age 62 by 12/31/15, you can file a Restricted Application through the year 2019 (when you’ll reach FRA). To reiterate, a Restricted Application benefits a 2-income household by allowing one spouse to receive spousal benefits (typically ½ of the primary earner’s benefits) while allowing their own to grow.

To summarize: in the near future, the date you file for benefits will determine the Social Security benefits for both the primary and secondary spouse when claiming spousal benefits. In other words, for purposes of receiving spousal benefits, both spouses will be deemed to file for full retirement benefits on the same date.  No more playing with the rules to get every last cent of Social Security benefits squeezed out.

And who, exactly, is benefitting from all these changes (other than Washington, DC)? That would be all of the programmers who now have to correct a multitude of soon-to-be-irrelevant Social Security software calculators (both free and paid). Not only do they have to remove all of the outdated code, they have to come up with some new tricks so people will still want their software.

Deciding on when to file for Social Security is about to get a lot simpler. Can waiting to file really make much difference? You betcha! Watch my video to see what you could be leaving on the table by being impatient.

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