WHAT TO LOOK FOR
- Who isn’t affected by the new Budget Act?
- Which filing options have been changed?
- What provisions exist for those near but not yet at retirement age?
Embrace it or not, our lives are consistently marked by inescapable change. What else can we do then, but understand the why’s and how’s, and find our footing on a new path forward? Especially is this true when our family’s financial future is affected. So when it comes to recent updates in Social Security policy and their fast approaching deadline, we’re ready to do our part to make the coming changes more clear, more accessible. It’s time to break down jargon and build confidence, quash confusion and foster understanding.
The Bipartisan Budget Act of 2015 (Budget Act) brought changes in filing guidelines, limiting possibilities for married couples who aren’t ‘grandfathered in’ to the current system’s rules. But even those who are able to sneak by have to be worried about timing. When the new codes were signed into law, a 6-month grace period went into effect, which runs its course on April 29th, 2016. If you’ve already filed for benefits, then no worries—you’ll be held to the old rules. But for those who have reached full retirement age (FRA) and haven’t filed, you have some decisions to make, and fast.
Full retirement age (FRA):
Currently 66 years of age, this is the point at which 100% of retirement benefits are available. Filing before FRA will result in lower benefits, while each year that retirement is delayed benefits will build 8%, up to age 70.
One very popular claiming strategy—and a way to allow benefits to build—involved the higher-earning spouse filing for benefits at FRA and then immediately suspending receipt of benefits. Not only did the “file-and-suspend” method allow delayed retirement credits to accrue (increasing benefits by 8% every year), but it also opened up eligibility to the filer’s spouse to collect spousal benefits. Assuming then that the husband’s income is higher and would result in a higher Social Security benefit, his wife could receive roughly half the amount of his projected claim. She could continue to receive this amount even while her own benefits were left to grow. Dependent, minor children, and adult, dependent disabled children were also able to file on a parent’s suspended claim.
Delayed retirement credits:
After FRA is reached, and up to age 70, retirement benefits are increased by 8% for each year that retirement is delayed, with the potential for a maximum 32% higher benefit amount.
This technique was the best of both worlds: money was coming in, but it was also building up. Once the higher earner reached 70, then any suspension could be removed, and the benefits would begin flowing at a higher rate. For those who have already filed and suspended, or will reach FRA and file and suspend by April 29, 2016, this ideal scenario is still your reality.
“File and suspend” AKA voluntary suspension:
A strategy previously used to activate spousal and/or dependent benefits while allowing personal retirement benefits to grow. Still an option from FRA to age 70, “file and suspend” has been revised to suspend all dependent benefits when it’s employed.
The caveat, brought on by the Budget Act, lies in the timing: if you’ll reach FRA before the end of April, and you haven’t already filed for Social Security benefits, time is of the essence. Once the deadline passes, age doesn’t matter—new rules will apply for everyone. So if you’re banking on the ‘file-and-suspend’ strategy as part of your retirement plan, it’s decision-making time.
Most everyone is affected by these policy changes. Besides those who are grandfathered though, there is one group that remains completely untouched in the Budget Act: those who will receive survivor benefits. Whether you’re a surviving spouse, or a minor or disabled child whose parent passes away—no one’s messing with your benefits. And as with all benefits that stem from another’s Social Security records, it helps to have reliable advice to determine the most financially sound path forward. This is a case in which variables can multiply exponentially.
Claimed by either a surviving spouse, ex-spouse, or dependent or disabled children, survivor benefits are based on the deceased’s work record.
IN A POST-DEADLINE WORLD
For those who aren’t grandfathered in, there are some big, life-altering changes ahead in Social Security filing policies. For these folks, the option to file-and-suspend while simultaneously enabling a spouse to claim on their record has been eliminated. This move repeals a law passed in 2000. According to the SSA, the “file-and-suspend” strategy is a thing of the past for any who can’t or who are eligible but choose not to file by April 29, 2016. Put simply, “In the future, the only reason to file and suspend would be to earn delayed retirement credits of 8% per year up to age 70.” (Source) And the future scenarios in which filing and suspending could be beneficial are limited, at best.
What’s the real-world impact? Well for one, during a suspension, your spouse won’t be able to claim spousal benefits, and vice versa—if you voluntarily suspend benefits on your own record, you’ll also be suspending any spousal benefits you’re receiving. The bottom line fueling new Budget Act laws is that in most cases, a suspension on the part of one equals a suspension for all. And yet while ex-spouses evade this new suspension rule, disabled or dependent children do not: a parent must be receiving Social Security benefits in order for a “child’s” benefit to be available. The only way to allow for dependents or a spouse to claim, would be for the primary claimant to receive benefits outright. When it comes to filing for benefits within the same household, these new rules take an ‘all-or-nothing’ stance—either everyone collects, or no one does.
TO RECAP: besides forgoing the annual 8% bump in benefits, filing and suspending will effectively deny your family any benefits based on your work record. Also, since “deeming” dominates, filing for any benefits at all will lock in your benefit amount and limit your total. Depending on your family’s financial situation and array of ages and circumstances, this one change could be a huge setback, and there are countless personal stories that bear this out. Here’s where having a solid financial plan in place will save you. For while Social Security benefits are a necessary component of retirement planning, the system simply wasn’t designed to replace your working income. As always, financial responsibility begins and ends with each of us, individually.
Admittedly, things could be taken to sound pretty dismal. But take heart—there is some good news for a slice of the population who haven’t yet reached FRA. While folks who were at least 62 by the end of 2015 but won’t be at FRA by the end of April (ages 62-65) will still be in the majority that will lose out on all the benefits of the previous file-and-suspend strategy, when they do reach FRA, they will escape the effects of revised “deeming rules.” More explanation necessary? We’re way ahead of you.
The definition goes: “Deemed filing means that when you file for either your retirement or your spouse’s benefit, you are required or ‘deemed’ to file for the other benefit as well” (no file-and-suspend allowed). The recipient would ultimately receive the largest amount of the two, be it spousal or personal. This stipulation always applied to anyone claiming from age 62 until FRA was reached, and it still does—nothing’s new there. What has changed though, is that the new law extends the deeming rules through to age 70.
Whether you file for spousal or personal retirement benefits, you’ll be “deemed” as filing for both, and thus receive the highest of the two. This has always applied to anyone filing before reaching FRA, but new legislation extends deeming rules to everyone born after January 1, 1954.
Wait, this is supposed to be good news? Well, this little part of it is: those who were at least 62 as of January 1, 2016 will retain the right to file and suspend their benefits while filing a restricted application for spousal benefits. This way, spouses whose own benefits wouldn’t amount to much if claimed at 66, can instead suspend their benefits and earn delayed retirement credits, while at the same time filing for and collecting spousal benefits on their spouse’s work record. This provision for the restricted application for lower-earning spouses would effectively keep things at the status quo for couples whose ages fall in the right span. The same ‘restricted application’ exception holds true for those who are divorced but wish to file on their ex-spouse’s record.
For use by the spouse of a primary earner, the restricted application allows a lower earning spouse to apply for benefits based on their husband’s or wife’s work record. The amount received is typically around half of the high earner’s retirement benefits.
A LOST LUMP SUM
Above and beyond “deeming,” suspension rules and restricted applications, there’s another part of the new legislation that gets a little “nasty,” according to Social Security expert Larry Kotlikoff. What was officially known as the “retroactive benefits” provision and commonly called the “lump sum” option, will be discontinued, except for those who have filed for benefits by the April deadline.
Retroactive benefits (lump sum option):
Retroactive benefits worked in tandem with the file-and-suspend strategy. After ending a suspension anywhere between FRA and 70, the claimant could then request a lump sum payment of all delayed retirement benefits.
Previously, those who reached FRA and then delayed benefits had the option to undo this decision before reaching age 70, but without losing accumulated benefits. At this point, a “lump sum” of all delayed benefits would be paid to the claimant. A viable and often necessary option for those who would perhaps become terminally ill at, say, age 69, retroactive benefits allowed them to receive their suspended Social Security benefits to offset medical costs or other expenses. Now, unless grandfathered in, this “very valuable strategy for someone who had a change in health or financial status,” is gone. While anyone can un-suspend receipt of benefits, they can no longer collect a retroactive lump sum.
FROM ANGST TO ACTION
Now that we’re all on the same page about the grandfathering rules and what’s about to be history, we can see more clearly just what’s at stake if someone doesn’t fit the criteria. In fact, some couples who aren’t grandfathered are projecting ahead and realizing that the amount of benefits they’d retain if they divorced now and remarried at 70—or held off remarrying in the case of divorced or widowed folks—are hard to pass up. And while we’re not suggesting or condemning such a decision, we’re compelled to bring it up as a matter of example. It’s obvious: the state of future Social Security benefits has people in quite a tizzy.
That’s because we’re all interested in getting what’s coming to us. And when that’s financial in nature, we don’t want to waste a cent. Especially when we’re talking about supporting a decades long retirement, even loose change starts to take on newfound value. Factoring in new policies and rule changes, depth of knowledge and breadth of experience shift from prerequisite, to invaluable. And yet, behind these complications is a simple truth: we’re all looking to maximize what we have. Looks like it’s time to channel doubt and worry into action and planning, and get in front of this issue before the time’s behind us.
- Those who have already filed, who are due to receive survivor benefits, or who will reach FRA and file by April 29, 2016 are not affected by the Budget Act.
- The Budget Act will affect the ‘Lump Sum’ option, ‘File and Suspend’ strategy benefits, and the ‘File and Lock’ option.
- Those at least 62 by January 1, 2016, but not FRA by April 29, 2016 can still take advantage of a restricted ‘File and Suspend’ option.