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New rules have eliminated and/or limited two Social Security filing strategies that have helped married couples collect thousands of dollars in added income over their lifetimes
On Nov. 2, 2015, President Obama signed into law H.R. 1314, the "Bipartisan Budget Act of 2015." One significant byproduct of the legislation is the elimination and/or curbing of two Social Security filing strategies that two-income married couples may have been using – or counting on – to increase their lifetime Social Security payouts. The two programs, referred to in the bill as "unintended loopholes," generally involve one of the following strategies: file and suspend and restricted application for spousal benefits. As with most things related to federal programs, there's complexity in the details.
Here are a few key points of explanation about the strategies and how the new law will change and/or eliminate them, along with some takeaways you may want to discuss with your advisor.
What's at Stake? – Very generally, the strategies in question allowed both spouses who had reached full retirement age (currently 66 for most claimants) to delay claiming benefits on their own earnings records -- and, thus, increase their individual annual payouts -- while, depending on the tactic used, also allowing one spouse to claim a so-called spousal benefit based on the other's earnings.
Under file and suspend, for instance, typically the higher earning spouse would start receiving Social Security payments and then suspend them, allowing the lower earning spouse to claim spousal benefits. Under restricted application for spousal benefits, typically the higher earning spouse would delay filing for his or her own benefit but claim the spousal benefit on the lower earning spouse's benefit.
In both scenarios, the end game for couples was to delay receiving benefits, perhaps until as late as age 70, and thereby increase Social Security payments by six percent to eight percent per year – potentially adding thousands of dollars more in income over their lifetimes.
What's Changing? – While dual-earner couples will still be able to suspend their payments and start up again at a higher rate no later than age 70, under the new rules they generally can no longer "double dip" -- that is, first collect one type of payment (i.e., spousal benefits) and then switch to payments based on their own earnings record, which would have grown due to delayed retirement credits. Similarly, in most cases, if you suspend payments, the new law will prohibit spouses or other dependents from claiming Social Security benefits on your work record until you resume payments again.1
Windows of Opportunity – Note that there is a four-month window in which these strategies will still be in effect in their current iterations. So if you are 66 now, or will turn 66 within the next four months, you may want to speak with your advisor about taking advantage of these claiming options before you lose the option to do so.
Also keep in mind that your age plays a key role in how the new rules may impact you. For instance, individuals who will be 62 or older as of Dec. 31, 2015, may still be able to take advantage of some of these strategies once they reach full retirement age.2
In addition, those who are already employing these strategies are generally "grandfathered," and their benefits will not be eliminated or changed by the new laws. Similarly, widows and widowers generally won't be affected, while divorced persons and same-sex married couples may be among the groups most adversely affected by the changes.
While determining when and how to claim Social Security benefits has always been a challenging task, these new rules create even more complexity for those nearing retirement. If you need help navigating the changing Social Security landscape, speak with your financial advisor.
1U.S. News & World Report, "How the Budget Deal Changes Social Security," Nov. 13, 2015.
2MarketWatch, "Millions of Americans just lost a key Social Security strategy," Nov. 7, 2015.
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