Did you know that the Bipartisan Budget Act of 2015 contains a provision that can significantly affect the retirement planning of many Americans, likely costing them thousands of dollars in Social Security benefits?
The provision eliminates two strategies that many married couples have used to maximize Social Security benefits. Some couples, however, may be able to take advantage of “grandfathering” and a grace period to continue using the strategies. And certain married and unmarried individuals who act quickly can seize an opportunity to use Social Security benefits as a quasi insurance policy.
Social Security benefits in a nutshell
For Social Security retirement benefits, full retirement age is age 66 for those born in 1943 through 1954, gradually climbing to age 67 for those born after 1959. But you can claim retirement benefits (based on your own earnings) starting as early as age 62 or as late as age 70. If you begin receiving retirement benefits early, they’re reduced a fraction of a percent for each month before your full retirement age.
You could lose as much as 30% of your retirement benefits if you choose to begin receiving them early, according to the Social Security Administration. For example, if you begin taking retirement benefits at full retirement age in 2015, your maximum benefit would be $2,663. If you begin at age 62 in 2015, your maximum benefit would be only $2,025.
On the other hand, holding off on taking your retirement benefits can result in larger benefits because of “delayed retirement credits.” Individuals born after 1942 earn an 8% credit for each year they delay benefits after reaching full retirement age, up to age 70. For example, if you begin taking retirement benefits at age 70 in 2015, your maximum benefit would be $3,501. It’s this opportunity to delay and compound benefits that forms the foundation for the two strategies eliminated under the budget act.
The file-and-suspend method
Under previous law, when you reached full retirement age, you could file for your Social Security retirement benefits and then suspend the benefits so that they wouldn’t be paid out to you until you elected to begin receiving them (typically at age 70). Using this strategy, you’d receive delayed retirement credits during the period benefits are suspended and, ultimately, increase the amount of survivors benefits after your death. Why bother filing just to suspend? Because your spouse can’t claim spousal benefits based on your earnings unless you have already filed for your retirement benefits.
This strategy was particularly appealing for married couples where one spouse had earned substantially more than the other. After the higher-earning spouse had filed and suspended, the other spouse could receive spousal benefits based on the higher-earning spouse’s earnings record if they would be more than the spouse’s own retirement benefits based on his or her own earnings record. Spousal benefits for spouses who’ve reached their full retirement age are generally 50% of the higher-earning spouse’s full retirement amount.
Under the new law, your spouse can’t receive a benefit based on your earnings unless you’re receiving your retirement benefits — simply filing won’t be enough. (And an individual who suspends his or her retirement benefits can’t receive benefits on the basis of another individual’s earnings.)
The elimination of this strategy may have far-reaching repercussions, but some couples will be able to escape them through a “grandfathering” provision. Those who’ve already been using the file-and-suspend method and other eligible individuals who file to claim benefits within 180 days of November 2, 2015, can continue to use the strategy. In other words, if you’ll turn age 66 before May 1, you can file and suspend by that date to preserve your spouse’s ability to claim a spousal benefit, while your retirement benefits grow until they max out when you turn age 70.
The restricted application method
Under the restricted application method (also known as the “claim now, claim more later” method), a spouse reaching full retirement age who is eligible for both retirement benefits and spousal benefits could file a restricted application for spousal benefits only and delay applying for his or her retirement benefits, allowing those benefits to build. The spouse could switch to his or her own retirement benefits at any time up to and including age 70.
So a higher-earning spouse who has hit full retirement age could delay taking his or her retirement benefits and instead claim spousal benefits (assuming the lower-earning spouse has already filed for his or her retirement benefits). The higher earner grows his or her retirement benefits while receiving 50% of the spouse’s full retirement benefit, regardless of whether the spouse has reached his or her full retirement age.
When the higher earner switches to his or her retirement benefits, the spouse can switch to a spousal benefit based on the higher earner’s retirement benefits at full retirement age (assuming that amount is greater than the spouse’s own retirement benefits). This approach allowed some married couples to increase their benefits by tens of thousands of dollars.
The new law phases out the restricted application method. Those who will turn age 66 before May 1, 2016, can still file a restricted application at any time between ages 66 and 70. Those who will be age 62 before the end of 2015 can also continue to file a restricted application for spousal benefits when they reach age 66 if their spouse is either receiving retirement benefits or was able to file and suspend before May 1, 2016 (meaning the spouse was age 66 on or before that date). But such an application isn’t available to anyone younger.
Social Security benefits as “insurance”
The file-and-suspend method also operated as a quasi insurance policy to the advantage of both married and single individuals. Until now, you could file and suspend at full retirement age but later opt to receive a lump-sum payout back to the date of the application. That retroactive payout could come in handy in the case of a catastrophic illness or injury or the need for long-term care.
The new law prohibits the payment of retroactive benefits for people who don’t file and suspend before May 1, 2016. If you’ll turn age 66 before then, you should file and suspend before that date so that you’ll have the option of retroactive payouts.
Even without the file-and-suspend and restricted application strategies available, decisions regarding when and how to tap Social Security require much consideration of factors such as your current health, family medical history and other resources. We can review your circumstances and help you make the right choices regarding Social Security benefits.