Who says Congress can’t act quickly when they need to? Just last week they rapidly (after much previous delay) approved budget legislation to narrowly avoid a government shutdown. Unfortunately, buried deep in the pages of that budget—probably somewhere between synchronized swimming studies on Sea Monkeys and a real life iron man suit (actual expenditures in previous budgets)—was a provision that ends two popular and lucrative Social Security claiming strategies. What are the changes to your Social Security claiming options and how will they affect you?
Change #1: Restricted Application for Spousal Benefits
Prior to the change, a person who was eligible for both a benefit based on their own work record as well as a spousal benefit based on their spouse’s work record, could choose to file a restricted application for only the spousal benefit at Full Retirement Age. This would allow their own benefit to continue to grow by earning delayed retirement credits. Then at some future date (as late as age 70), when their own benefit had grown to exceed the spousal benefit, they could switch to the larger benefit. The new law gradually phases out this option.
Those born on or before January 1, 1954 will continue to have the option to file a restricted application for spousal benefits. Those born after that date will not. In other words, if you’re 62 or older by New Year’s Day 2016, you’ll still have the option to file a restricted application once you reach Full Retirement Age (66 for those born between 1943 and 1954). If you’re younger than 62 on New Year’s, it’s Auld Lang Syne for the restricted application option. It should be noted that this change does not affect the ability of widows to file a restricted application for widow benefits and later switch to their own benefit.
Change #2: File and Suspend
Under the old law, there was a strategy called “File and Suspend” whereby a person could file for their benefits, but choose to immediately suspend payment of those benefits. Why would someone do that? The answer lies in the fact that you need to claim your own Social Security benefits before anyone else can claim benefits based on your record. In other words, you need to claim your benefits before your spouse can claim spousal benefits based on your record. But what happens if it makes sense for your spouse to file now, but you want to delay filing so you can continue to earn delayed retirement credits? Enter the “have your cake and eat it too” File and Suspend strategy, which allows your spouse to go ahead and claim benefits on your record while simultaneously allowing you to continue earning delayed retirement credits.
Under the new law, anytime a person suspends their benefit, it will automatically suspend payments to anyone else receiving benefits based on that record. This effectively eliminates the File and Suspend strategy going forward. About the only time it will make sense to voluntarily suspend will be if you change your mind on claiming your benefits and want to suspend payments so you can start earning delayed credits again. The new voluntary suspension rules take effect 180 days after enactment of the new law, which is approximately May 1, 2016.
What actions should you take as a result of these changes? For many people, losing these strategies will mean lower lifetime Social Security benefits, which could mean drawing more from savings or delaying retirement altogether. If you’ve done a Social Security claiming analysis on your own or with your adviser, you should review that analysis to see if the new law warrants a change in strategy. And if you haven’t yet done an analysis, but retirement is right around the corner, now is the time to review your options. The clock is ticking.
As always let me know if there’s ever anything I can do to help. And if you have any questions about the new rules, feel free to post them in the comments section of this article and I’ll do my best to answer them.