While you were focused on a million things this fall, something huge happened to Social Security. When President Obama signed the Bipartisan Budget Act of 2015, nestled among all the provisions were major changes to Social Security.
"These new rules make up the biggest reform to Social Security in 15 years. It’s not yet known how much money will be saved, but changes were necessary to keep the program funded. The last Social Security Trustee Report warned that Social Security would run out of money by 2033, and only be able to meet about 77% of its obligations after that point. This move is not a complete fix, but it will help the future of the program," says Nahum Daniels, a certified financial planner and retirement income certified specialist.
What does this "fix" include? Here’s what you need to know.
Fewer tools to maximize Social Security benefits
There will no longer be an option to "file and suspend". In the past, the file and suspend strategy was used like this. The primary wage earner applied for benefits, then suspended collecting. The other spouse immediately started collecting spousal benefits, allowing the primary wage earner’s benefits to grow by 8% per year until he or she reached age 70. Under the new rules, explains Daniels, no one will be allowed to collect a spousal benefit when the wage earner’s benefit is suspended. Couples who have already suspended benefits or will suspend benefits prior to May 1, 2016, will be "grandfathered" in. "Getting rid of this strategy could cost millions of future retirees as much as $50,000 in lifetime benefits," says Daniels.
Forget about retroactive benefits. Previously you could file for benefits, suspend them, and later request a retroactive lump sum for the time period in which benefits were suspended. The new law gets rid of this option. Moving forward, the only reason to file a suspension will be to correct a mistake. You will be able to accumulate delayed credits, says Daniels, but no one will be able to claim benefits on your record while it is suspended.
Then there’s the loss of the ability to file a restricted application. Prior to the new laws, people eligible for both spousal benefits and benefits on their own record could file a restricted application, meaning that at full retirement age, they could file for spousal benefits only, while allowing their benefits to grow. They would be eligible to switch to their own benefit at a later date. Under the budget deal, this strategy is no longer an option for anyone born January 2, 1954 or later.
Matt Cabray of Ridgewood Financial illustrates how big a deal the loss of this provision will be. Under the old rules, say a husband, age 66, and a wife, age 62, both want to retire at the same time, this is what they could have done. Assume that each is eligible for a $2,000 benefit per month at their full retirement age of 66. Because the wife is not her full retirement age, she would face a 25% reduction in benefits if she collected her benefit prior to age 66. As a result of the reduction, she would receive $1,500 a month at age 62. What the husband could do is apply for a "restrictive application" in which he is entitled to 50% of his eligible benefit or $1,000, all while allowing his benefit to continue to compound at 8% until age 70. At 70, he would apply for his own benefit based on his work history and would be eligible for a benefit of $2,640 ($2,000 compounding at 8% for four years). So while their benefit over the next four years would be $2,500, instead of $3,400, if they both elected benefits at the same time, because of the restricted application, they would collect a total of $4,140, instead of $3,500 at age 70 for as long as they live. Of additional importance is the higher survivor benefit of $2,640, versus $2,000, as a surviving spouse can only collect the higher of the two benefits upon the death of a spouse.
With Social Security such an important piece in most everyone’s retirement pie, there’s no room for missteps. The experts weigh in with strategies for dealing with the changes.
If you have already reached your Full Retirement Age (FRA), or will reach it on or before April 29, 2016, then initiating a File and Suspend filing with the Social Security Administration on or before April 29, 2016 will preserve the option for your spouse to receive a spousal benefit while your Social Security benefit continues to grow, says Terry Seaton, a consumer education advocate for the American Institute of CPAs.
If you’re a divorcee, were married at least 10 years and divorced for at least two years, relax, you’re not affected by rule changes. Why not? "It has never been a requirement that our former spouse even file for benefits in order for you to receive your spousal benefit," says Seaton. However, if you are a divorcee, were married for at least 10 years, but not divorced for at least two years, then the new rules apply to you.
If your spouse is deceased, you are not affected by these rule changes. You can still file for a spousal "survivor" benefit as early as age 60, allow your benefits to grow until 70, and then filed for a combination of benefits based on your own personal record and that of your deceased spouse, says Seaton.
The bottom line – talk to your financial advisor. Josh Trubow, a certified financial planner with Sensible Financial Planning offers this advice, "Couples should understand whether these changes will affect their benefit. If so, they should have some perspective on how much of a loss they might incur. They might want to work a little longer to make up for these losses if they were counting on Social Security as part of their financial plan, and determine how they can reduce spending in retirement."