Is now going to be more difficult for couples to maximize their Social Security benefits. On November 2, President Obama signed into law HR 1314--named the Bipartisan Budget Act of 2015-- which raised the debt ceiling and averted a government shut-down and bond default. Included in Section 831 of the legislation were provisions that eliminated the so-called “file and suspend” and the “restricted application” strategies employed by married couples. Many of the details need to be worked out by the Social Security Administration over the next few months, but here is what you need to know and do for now:
The "file and suspend" claiming strategy allowed a spouse to receive benefits while the higher earner filed for--and then suspended--his or her record in order to hold out for a larger payment in the future. Starting May 1, 2016, it will no longer be possible to file and suspend an individual's benefit for the purpose of the spouse claiming his or her spousal benefit. This will not affect those who are already receiving file and suspend benefits, nor will it impact those who turn full retirement age (66) on or before April 30, 2016 unless they haven't officially filed and suspended benefits.
The new rules on the “restricted application” strategy (often called the “claim-now, claim-more-later strategy”) apply to anyone who turns 62 on January 1, 2016 or later. Under this strategy, higher earning spouses over age 66 could claim 50% of their spouse’s benefit, then claim a higher benefit on their own record at a later age. Under the new legislation, only one benefit (the higher one) can be claimed after full retirement age.
These strategies were originally made possible by the Senior Citizen Freedom to Work Act of 2000, which seemed like a good idea at the time. Now it has become an expensive benefit. The Center for Retirement Research has estimated that eliminating these two strategies will save about $9.5 billion in annual costs to the program over the next 10 years and more likely benefit higher-income beneficiaries.
The Silver Linings?
The savings will help shore up the troubled finances of the Social Security Disability fund and slightly extend of time before the so-called Social Security Trust Fund is depleted. Disability eligibility rules have also been tightened, but the projected 20% cut in benefits has been diverted. Also, the 30% of Medicare beneficiaries not subject to the hold harmless provision (mostly those just turning 65), will see just a 15% increase in premiums, not 52%.
What Should You Do?
- File and suspend: If you are/turn age 66 or above between now and April 30, and you plan to employ this strategy, then you must file and suspend by April 30, 2016, otherwise you lose this opportunity. Your spouse can then collect his/her spousal benefit of 50% of the benefit you are suspending until a later age. The benefit increase by 8% per year from age 66 to age 70. If you are unfortunate to turn age 66 on May 1, 2016, you are out of luck.
- Restricted application: If you are age 62 or above as of December 31, 2015, you can still file a restricted application when you turn 66 in four years. If you will turn 62 after January 2, 2016, you cannot.
- Even without these two strategies, in most cases, it makes sense to defer taking your benefit as long as possible (to age 70). When calculating a break-even analysis, it’s important to remember the extra long-term benefits the higher earner will provide to a widowed spouse.
- Widows are generally unaffected by these new changes, but the situation is still unclear about how it will affect those who are divorced.
- Whether you plan to use these strategies or not, you should seek advice before claiming Social Security benefits. Other factors come into play, including your longevity, earnings history, age differences, and other financial resources.