By Bruce Bechhold, CPA, Walthall CPAs
When Congress unexpectedly eliminated two Social Security claiming strategies as part of the Bipartisan Budget Act of 2015, retirement planning got a little more complicated for people who expected to use those strategies to boost their retirement income. The following Q&A should shed some light for you.
The provision of the budget bill called “Closure of Unintended Loopholes” addresses two Social Security claiming strategies that were popular over the last several years. These strategies, “file and suspend” and “restricted application for a spousal benefit,” have been used to increase cumulative Social Security income for married couples.
Under the old rules, an individual who had reached full retirement age could file for retired worker benefits in order to allow a spouse or dependent child to file for a spousal or dependent benefit. The individual could then suspend the retired worker benefit in order to accrue delayed retirement credits and claim an increased worker benefit at a later date, up to age 70.
Under the new rules, effective for suspension requests submitted on or after April 30, 2016, the worker can file, suspend, and accrue delayed retirement credits, but no one can collect benefits on the worker’s earnings record during the suspension period. The new rules also mean that a worker who files and suspends can no longer request a lump-sum payment in lieu of receiving delayed retirement credits for the period during which benefits were suspended.
Under the old rules, a married individual who had reached full retirement age could file a “restricted application” for spousal benefits after the other spouse had filed for retired worker benefits. This allowed the individual to collect spousal benefits while delaying filing for his or her own benefit, in order to accrue delayed retirement credits. With the new rules, an individual born in 1954 or later who files a benefit application will be deemed to have filed for both worker and spousal benefits, and will receive whichever benefit is higher. He or she will no longer be able to file only for spousal benefits.
A limited window still exists to take advantage of these two claiming strategies. If you are currently at least age 66 or will be by April 30, 2016, you may be able to use the file-and-suspend strategy to allow your eligible spouse or dependent child to file for benefits, while also increasing your future benefit.
If you are already using the file-and-suspend or the restricted application strategy, you will not be affected by the new rules. You have already met the age requirements.
Why did Congress do this?
Both the file-and-suspend, and the restricted application strategies were made possible by the Senior Citizens Freedom to Work Act of 2000. Part of this act’s original intent was to enable individuals to change their minds in the event they determined that they wanted to work longer but were already receiving Social Security retirement benefits. However, this opened up some claiming strategies that went beyond the intent of the legislation. Congress used the budget bill to close these loopholes in order to save money and reduce the long-range actuarial deficit faced by Social Security.
How are benefits for surviving spouses affected?
Rules affecting surviving spouses have not changed. If you are eligible for both a survivor benefit and a retirement benefit based on your own earnings record, you can still opt to receive one benefit and switch to the other higher benefit later.
What planning opportunities still exist?
Even if you can no longer take advantage of the file-and-suspend and restricted application strategies, there are other filing options. The age when you begin receiving Social Security benefits can significantly affect your retirement income and income that is available to your survivors.
Basic options for claiming Social Security remain unchanged. The earliest you can receive Social Security retirement benefits is 62. If you choose to take benefits before your full retirement age (66 to 67), your benefit will be permanently reduced by as much as 30%. On the other hand, if you delay receiving Social Security benefits past your full retirement age, you’ll receive delayed retirement credits, which will increase your benefit by 8% for each year you delay, up to age 70.
Determining when to file for Social Security benefits is one of the biggest financial decisions you’ll need to make as you approach retirement. There’s no “one-size-fits-all” answer. It is best to talk to an adviser to discuss your unique situation to determine what is best for you.