The New Social Security Claiming Rules

Congress snuck a major change to Social Security benefits claiming strategies in the latest budget, known as the Bipartisan Budget Act of 2015. The change is likely to cost retirees who would have planned carefully tens of thousands of dollars over their lifetimes. The loss is about $50,000 per couple, according to a Bloomberg.com estimate.

The law eliminates or curtails two claiming strategies about which we’ve written for years. Apparently some people in the administration and Congress have been opposed to these strategies and aiming to eliminate them. Instead of the usual process of proposing laws and having them discussed in committees, they managed to have the provisions inserted into the budget deal reached in October by the President and congressional leaders. The strategies were created in a 2000 law, and opponents of the strategies believe they were unintended loopholes or effects of the 2000 changes.

The two strategies are known generally as “restricted application,” or “claim now, claim more later,” and “file and suspend.” Here’s a summary of how they work, or worked.

Restricted filing. A married person generally receives retirement benefits of the higher of his or her own earned benefit and 50% of the amount his or her spouse would receive at full retirement age. But a special rule allowed anyone at normal retirement age (age 66 for those retiring in recent years) or older to file an initial claim for spousal benefits only. This allowed the person to receive some Social Security benefits while either continuing to work or simply allowing his or her own Social Security benefits to increase 8% annually through age 70. The person was allowed at any time to switch from spousal benefits to earned benefits. One spouse had to have already filed for retirement benefits in order for the other to file a restricted application for spousal benefits only.

File and suspend. Spousal benefits can be received only if the other spouse has filed to claim retirement benefits. The file and suspend strategy allowed the lower-earning spouse to receive the spousal benefit while the higher-earning spouse continued to defer receiving benefits and accrued the 8% annual increase from delaying benefits. The higher earning spouse would file for retirement benefits at full retirement age or later and then immediately suspend the benefits. Filing for benefits allowed the other spouse to file for the higher of his or her earned benefits and the 50% spousal benefit. Suspending the filing didn’t affect that. But the suspension reinstated the monthly increase from deferring benefits until the higher-income spouse decided to begin benefit payments.

These strategies were described in detail in past visits, and are available in the Cash Watch section of the Archive on the members’ web site and also in my report, Secrets to Boosting Social Security Benefits, available through Bob’s Library on the web site.

The strategies are largely eliminated, but the changes are being phased in, so some people still have the opportunity to take advantage. Here are the changes.

? Restricted filing. The ability to file a restricted application for spousal benefits at full retirement age or later is eliminated. The elimination applies to those who turn 62 after 2015 (those born in 1954 or later). Every one in that age group will be treated as applying for the higher of his or her earned benefits and the spousal benefit.

? File and suspend. This strategy is allowed for six months following the November 2 enactment of the law. So, if the higher earning spouse is age 66 or older within the six months, the strategy still is available.

After the six month grace period, someone who has filed for retirement benefits still can suspend them anytime after reaching full retirement age. The catch is that benefits also stop to almost anyone else who is receiving benefits based on that person’s earnings. That includes spouses and minor and disabled children receiving benefits based on the person’s earning history.

So, a higher-earning spouse won’t be able to file and suspend in order to allow the lower-earning spouse to receive the higher spousal benefit. Keep in mind that while a spouse is entitled to the higher of his or her earned benefits and 50% of the other spouse’s full retirement age benefit, the spousal benefit is payable only after the higher-earning spouse has filed to receive benefits. Now, the higher-earning spouse has to make a choice: file to receive benefits earlier than planned in order for the other spouse to receive the higher spousal benefit, or wait to begin benefits so that the benefit payment will be higher.

Anyone already using either of these strategies isn’t affected. You might have seen reports saying that you are affected. That’s because the original version of the law would have terminated the strategies for those already using them. But the final version has the transition rules described above. Only those who might have used them after the law’s passage are affected.

A reason the file and suspend strategy made sense was the survivor’s benefit. When one spouse dies, the surviving spouse receives the higher or his or her earned benefit and what the other spouse was receiving at the time of death (or was entitled to at full retirement age if benefits hadn’t begun). It made sense for the higher-earning spouse to wait until age 70 to receive benefits if possible, because it ensured that the surviving spouse of the two would receive the highest possible benefit for life. In effect, having the higher-earning spouse delay benefits is a cheap form of life insurance.

The survivor’s benefit rule still is in place, and it probably still makes sense for the higher-earning spouse to delay benefits until age 70 to ensure the maximum lifetime benefit for each spouse. The lower-earning spouse will have to be content with his or her earned benefits during that time instead of a higher spousal benefit.

Another strategy that isn’t affected is for those who have other reasons to suspend benefits after full retirement age. Suppose Max Profits is younger than 70 and files to begin receiving retirement benefits. Perhaps he was laid off or intended to retire. After some time, Max is back in the work place and earning enough that he doesn’t need the Social Security benefits. He decides it makes more sense to suspend the benefits so that they can earn some delayed retirement credits. When Max eventually resumes the benefits, they will be higher than when they were suspended because of the delayed retirement credits. In that case, he can suspend benefits any time after reaching full retirement age. But he can’t suspend benefits until full retirement age. So, if he begins benefits as soon as possible at age 62, they can’t be suspended until full retirement age.

The new law also doesn’t affect the benefits of divorced spouses. They still can qualify to claim benefits on an ex-spouse’s earnings record without regard to whether the other spouse has filed to receive benefits or suspended benefits.

Here’s another strategy that’s affected. Suppose after filing and suspending benefits, Max decides he not only needs to resume the benefits but he also needs additional cash. Previously, he could have benefits resumed retroactively, receiving a lump sum for up to six months of past benefits plus have his benefit checks resume. Under the new law, the lump sum apparently is no longer available.

Of course, if you were considering file and suspend and will be 66 or over within the six-month grace period, you need to decide whether or not to execute the strategy.

For everyone else, there still are decisions to be made about when to receive benefits and coordinating them between spouses. You should wait for the web site calculators to be updated for the new rules before you make a decision. Good calculators that charge fees are at www.MaximizeMySocialSecurity.com and www.SocialSecuritySolutions.com. There also are good free calculators at the web sites for T. Rowe Price and AARP.

RW December 2015.