Social Security Changes Still Causing Confusion
Social Security benefit claiming strategies continue to perplex much of the working public. Adding to the confusion are changes in late 2015, so let’s address those changes, hopefully in a straightforward, easy to understand format as possible given the subject. The Bipartisan Budget Act of 2015 affected two primary areas of Social Security benefits.
File and Suspend
The claiming strategy known as “file and suspend” is no longer available, but those who filed and suspended by the April 29, 2016 deadline are grandfathered under the old rules, as are their spouses and dependents.
File and suspend triggers benefits for spouses and/or minor dependent children or permanently disabled adult children while the worker’s own benefit would continue to accrue delayed retirement credits worth 8% per year up to age 70. At that point, the worker could claim his maximum benefit — worth up to 32% more than his full retirement age amount — which would also create the largest possible survivor benefit for whichever spouse (or ex-spouse) was left behind.
Beginning April 30, 2016, anyone can still suspend their benefits at or after full retirement age to earn delayed retirement credits, but no one can collect benefits on the worker’s earnings record during the suspension, and the worker cannot collect benefits on anyone else’s record.
The strategy also allowed anyone who had filed and suspended their benefits to change their mind at any time up to age 70 and request a lump sum payout of all suspended benefits in lieu of collecting delayed retirement credits. The option to collect suspended benefits in a lump sum is not available to those making the election after April 29, 2016.
In summary, the only reason a worker would now suspend benefits is to earn delayed retirement credits to make up for an earlier benefit claim. However, as stated above, this would usually only make sense if it doesn’t affect another family member collecting on the worker’s record.
The second major change involves new “deeming” rules. Whenever someone is entitled to more than one type of Social Security benefit, they are now automatically “deemed” to apply for all available benefits and would be paid the larger of the two amounts.
In the past, the deeming rules only applied when benefits were claimed before full retirement age. Now, deemed filing apples to those at full retirement age and beyond. There are two exceptions to this new deeming rule. One applies to spouses and eligible divorced spouses based on birth date. The other applies to widows, widowers and surviving ex-spouses.
People born before January 2, 1954, still have the right, when they turn full retirement age, to claim only spousal benefits — worth 50% of a worker’s full retirement age benefits amount — and allow their own benefits to continue to grow up to age 70. That assumes their spouse has already claimed benefits or filed and suspended benefits by the April 29, 2016 deadline.
In the case of divorced spouses, if the couple had been married at least 10 years and divorced for at least two years, each ex-spouse can claim Social Security benefits on the other’s earnings record — even if the worker had not yet claimed benefits. But to restrict a claim to only spousal benefits at age 66, one must have been born before January 2, 1954.
Widow (Survivor) Benefits
The new deeming rules do not apply to survivor benefits. When a surviving spouse is also entitled to his or her own retirement benefits, he or she can still claim one type of benefit first and switch to the other type of benefit later if it would result in a larger amount. Survivor benefits are worth the maximum amount if claimed at the survivor’s full retirement age. Retirement benefits continue to grow up to age 70. Remember, survivor benefits are a completely different benefit from a worker’s own retirement benefit or spousal benefits, creating more planning opportunities.
Social Security is an ongoing challenge to understand, and all too often I come across folks who have already made a sub-optimal decision. In 2014, we did a video series to provide more awareness of these issues which you can see here http://vwplanning.com/category/social-security/, including annotations for the 2015 changes.
For the average working couple, Social Security represents a retirement age asset the equivalent of $500,000 to over $1,000,000; for max earners, it’s even more. An asset of that size deserves careful attention in planning to maximize benefits.
Any information presented here is general in nature, believed to be reliable as of the date published and is not intended to be and should not be taken as legal, tax, investment or individual financial planning advice. Competent, licensed professionals should be consulted when implementing any kind of financial, estate, tax or investment strategy.