Popular Social Security Claiming Strategies are being eliminated
The Bipartisan Budget Act of 2015 included a section titled “Closure of Unintended Loopholes,” which has eliminated the popular Social Security maximization strategies of filing and then immediately suspending social security benefits and filing a restricted application for spousal benefits only.
Why would Congress close the loophole? As you may know, the Social Security Board of Trustees projects that program costs will rise, and that by 2035 tax revenue will only be enough to cover 75% of the promised benefits. The loophole originated from two different factors, which when combined, could add a significant amount of benefits over a couple’s lifetime; one was the increase of two income families and the other was the introduction of delayed retirement credits.
When the Social Security program was created in 1935, the United States had far fewer two income households. Traditionally, the working spouse would qualify for benefits, and the stay-at-home spouse received ½ of the working spouse’s benefits once the working spouse filed. The rise in two income households allowed individuals to have an independent choice of benefits when they reached full retirement age: take their own benefit or take ½ of their spouse’s benefit. (Read our blog on the Four Things Women Need to Know about Social Security.)
In 1983, Social Security added a sweetener to Social Security benefits if a person delayed filing for benefits past normal their normal retirement age. This delayed retirement credit is equal to 8% per year up to age 70. This increase is only on an individual’s own benefit, not the spousal benefit. This created some unique opportunities for someone to file for benefits and then immediately stop the benefit (file and suspend) to unlock the spousal benefit. Because neither person was receiving benefits on their own record, each of their benefits continued to receive delayed retirement credits. This allowed two income couples to supersize each of their benefits at age 70. The same strategy worked for someone divorced, who was married for at least 10 years. By closing the unintended loopholes congress removed the ability to file and suspend benefits and also removed having a choice of benefits. Going forward, an when an individual files for social security benefits they will receive the larger of the two benefits.
Do I still have time to take advantage of these claiming strategies?
Depending on your date of birth, as well as your spouse’s, you may be affected differently by these changes.
These changes are being phased in over time based on you and your spouse’s dates of birth.
YOU AND YOUR SPOUSE ARE BORN ON OR BEFORE APRIL 30, 1950 YOU ARE FULLY ELIGIBLE FOR “FILE & SUSPEND” and “RESTRICTED APPLICATION” STRATEGY
If you and your spouse were both born on April 30, 1950 or earlier, you are still eligible to “File and Suspend” and also file for a “Restricted Benefit”. If both you and your spouse fall into this date range, it remains an option for one of you to file for benefits at your full retirement age and then suspend the benefit, allowing you to earn delayed retirement credits of 8% per year until age 70. The other spouse would then be able to apply for a spousal benefit equal to 50% of their spouse’s benefit amount at full retirement age, allowing them to take advantage of delayed retirement credits until their own age 70, at which time they would apply for their own benefit. Please Note: You must file for and suspend benefits on or before April 29, 2016 to take advantage of this strategy.
YOU AND YOUR SPOUSE WERE BORN BETWEEN APRIL 30, 1950 and JANUARY 1, 1954 YOU ARE ELIGIBLE ONLY FOR “RESTRICTED APPLICATION” FOR SPOUSAL BENEFITS
If you and your spouse were born between April 30, 1950 and January 1, 1954, you will no longer be able to “File and Suspend,” but would be eligible to apply for the “Restricted Benefit.” In this scenario, the higher wage earner would not have the option of suspending their benefits and taking advantage of the delayed retirement credits. Suspending their benefit would also stop the dependent benefit, and therefore the spousal benefit would end. If you file a restricted benefit for spousal benefits only, your own benefit continues to grow at 8% per year.
YOU AND YOUR SPOUSE WERE BORN JANUARY 2, 1954 OR LATER YOU ARE NOT ELIGIBLE FOR EITHER “FILE & SUSPEND” nor “RESTRICTED APPLICATION”
If you were born January 2, 1954 or later, you are no longer eligible to take advantage of either the “File and Suspend” or “Restricted Application” strategies. When you apply for Social Security benefits, you are “deemed” to have filed under whichever benefit is higher (either your own or your spousal benefit), and you will not be allowed to change to another at a later date.
The rules concerning Social Security can be very complex and difficult to navigate. The timing of benefits also depends on your personal situation. A financial professional can help you understand how this fits into your overall plan.
Feel free to contact us to discuss.