On November 2nd, president Obama signed into law the Bipartisan Balanced Budget Act of 2015 that made several important changes to Social Security. Several very popular filing strategies are being eliminated, and many people will need to modify their retirement income plans to account for the new restrictions.
The changes in the new legislation addressed two common strategies for realizing additional income from the Social Security system. The first is typically referred to as “File and Suspend”. Previously, anyone over the Full Retirement Age (commonly 66), would be able to file for and then immediately suspend their benefits. During the time the benefits were suspended the payable benefit increased with delay credits and at the same time a spouse would be able to file for spousal benefits on the first person’s record. After the rule change, spousal benefits will only be payable if the first person is actually receiving the benefit. Suspending will result in spousal benefits being suspended as well.
A second option for those individuals who have suspended their benefits is to receive a one-time lump sum distribution of all benefits going back to the time they were suspended, while forfeiting the delay credits for that time. This has essentially been a method of “undoing” the suspension, and also an option to provide a larger one-time source of funds if needed. After the changes are implemented, this option will no longer be available.
The second change addressed was the ability to file a restricted application for spousal benefits only, without filing on your own record. Previously, once a person reached the full retirement age, they would be able to file for spousal benefits only, while their own benefit continued to increase with delay credits. Prior to the full retirement age, however, a concept called “deemed filing” was applied. In that case, the application for spousal benefits also triggered an application on your own record any potential delay credits were lost.
After the changes, the ability to file a restricted application will be eliminated. Filing for a spousal benefit will automatically be considered a deemed filing on your own record, regardless of your age. There will no longer be the ability to collect a spousal benefit and earn delay credits on your own record at the same time.
Each Social Security change will be implemented with a different timing. The first change to the rules on suspended benefits will be effective as of May 1st, 2016. Any benefits suspended prior to that date will still be eligible for spousal benefits to be paid. Beginning in May, new suspensions will result in spousal benefits being suspended as well.
The deemed filing rules will apply to anyone who turns age 62 in 2016 or later. If you were born in 1953 or earlier, you will still be able to file a restricted application for spousal benefits once you reach the full retirement age.
Who Should Act Now
There are several groups of people who will be affected by the changes and may need to make adjustments. Here are some examples:
- Anyone who is at least age 66 prior to April 30, 2016 should consider filing and suspending if they have not filed already. At the very least, it keeps options open that would otherwise be closed without any detrimental effect to their own benefits. This would apply even if your spouse is not old enough to file for spousal benefits yet.
- Those people who will be 62 by the end of 2015 can continue to keep a restricted application for spousal benefits as part of their filing strategy and overall retirement income plan.
- Anyone born in 1954 or later will have to make necessary adjustments to their overall plan to accommodate the loss of the spousal benefit only option.
If these new rule changes will affect you, it would be a good idea to revise your overall retirement income plan. Changing Social Security strategies can affect overall income, short term cash flow, and even survivor benefits. It may also be necessary to adjust retirement timing or planned expenditures to account for the differences.
If you are in one of the transition age groups or are otherwise unsure what your options are, there are many different resources to help. There are websites that focus solely on Social Security strategies, and you can also talk to an advisor who could help coordinate your Social Security strategy with the bigger retirement picture. Either way, selecting the right path forward could potentially improve your retirement by thousands of dollars every year.