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Social Security Rules Changes
Submitted by Headwater Investment Consulting on November 12th, 2015By Kevin Chambers
The new budget deal between President Obama and Congress contains provisions that could cost retirees thousands of dollars in social security payments. The deal eliminates both the ability to “File and Suspend” as well as the “Restricted Application” strategy. These strategies have helped many American couples make the most of their social security benefits.
Understanding some of the basics of Social Security will help explain this strategy:
- Social Security payments increase every year you do not start taking them. If a retiree can fund their retirement through other means, it is often advantageous to delay taking social security benefits until the age of 70 (the maximum age to trigger Social security payments).
- Spouses can file for a spousal benefit, a proportion of their spouse’s benefit. After age 66, the spousal benefit is ½ of the spouse’s payment. This would be in place of a person’s own social security benefit.
File and Suspend: The file and suspend strategy employed knowledge of the above principles, and was usually used by couples in which one spouse made significantly more money throughout his or her career. It allowed the higher earning spouse to file for social security, and then immediately suspend taking benefits. This established a “base payment” and allowed the lower earning spouse to start receiving a spousal benefit while the payment for the higher earning spouse continued to increase. File and suspend has been a powerful tool used by many retirees to maximize their benefits.
Under the new rules, spousal benefits are only allowed if the other spouse is currently taking payments. The rule won’t go into effect until April 2016. At that time, those who have already implemented this strategy are grandfathered in and continue to receive their benefits as established. However, those who have not already completed a File and Suspend request will not be able to use this strategy.
Restricted Application: The ability to file a restricted application is also changing. Currently, a couple may decide to have one spouse trigger social security between the age of 62 and 66 to receive that person’s benefit each month. As the other spouse reaches full retirement age, that spouse will file a restricted application to receive 50% of the first person’s full retirement benefit, while their own benefit still grows each year until the benefits are maxed out at 70. If a spouse is currently receiving social security or will be electing to claim social security by May 1st, 2016 then the couple is still eligible for this strategy as long as each person is 62 or older by December 31st, 2015.
What happens if my Spouse and I will be under 62 by December 31st, 2015? Both of these strategies used by couples will be eliminated as options for any couple not over age 62 by December 31st, 2015. Individuals will only be allowed to receive the higher of either their own benefit or 50% of their spousal benefit. Once a Social Security benefit has been selected, it cannot be switched.
Why the change? Many people are wondering why Congress eliminated the two most popular Social Security strategies of all time. There are two primary reasons for the change. First, Congress and the Social Security office felt that the strategies were more advantageous to the wealthy. Wealthy couples could afford to wait to maximize their Social Security benefits while couples with more limited financial means could not. Secondly, these strategies increased the annual budget deficit each year. It was an estimated that it would increase the deficit by $9.5 billion next year.[1]
We help clients navigate the social security intricacies to take full advantage of the system. If you would like to discover your specific options, please give our office a call to schedule an appointment.
[1] Bernard, Tara. "Rarely Used Social Security Loopholes, Worth Thousands of Dollars, Closed." The New York Times. The New York Times, 30 Oct. 2015. Web. 9 Nov. 2015