On Monday of this week, President Obama signed into law the Bipartisan Budget Act of 2015 (BBA 2015). Along with many other provisions, the act eliminated two increasingly popular Social Security claiming strategies that will reduce potential future Social Security benefits to some married households by up to about $64,000 in total. Although I know this is disappointing, these two strategies were probably enacted into law by accident in 2000 when President Clinton signed the Senior Citizens' Freedom to Work Act of 2000. In attempting to reduce the disincentives to work for current Social Security beneficiaries, that 2000 law also inadvertently introduced two planning opportunities (i.e., loopholes) that have gained popularity in recent years. Essentially, when used together, the file-and-suspend and restricted application combination would allow married couples to delay their own primary benefits to age 70 for both spouses while allowing one of the spouses to claim on the other's record without reducing either's maximum age 70 benefit. For couples where the higher earning spouse had maximum Social Security earnings throughout his or her lifetime, this could amount to an extra $64,000 in Social Security benefits from ages 66 through 69 for the recipient claiming on the higher spouse's earning record.
President Obama had raised this issue in prior years' budget discussions with Congress and had made the case that these "aggressive claiming strategies" were putting an additional burden on the Social Security trust fund at a time when it could little afford it. Additionally, given that the introduction of the strategies was not specifically intended by the Senior Citizens' Freedom to Work Act of 2000, there was enough bipartisan support in the Republican-controlled Congress that the changes were included in this year's budget bill with relatively little debate.
Before I jump into the specifics, a quick disclaimer: please do not rely on this summary to make a critical claiming decision. If you have a decision to make about the timing of your Social Security benefits - especially if you are in Group 2 below, please call or email me so that we can review this decision in some detail to make sure you are making an optimal decision for your specific situation. Additionally, if you have friends, family members or neighbors whom you think might be in need of assistance with this critical decision, please don't hesitate to have them give us a call. I would be more than happy to spend a few minutes chatting with them to make sure that they don't make a very costly, irrevocable mistake regarding their Social Security benefits.
Ok! Onto the good stuff - and I'll try to keep this brief but, in doing so, will sacrifice some of the nuances of the changes, but hopefully none that will affect the important retirement-related time-sensitive decisions that need to be made. Again, don't make a decision based on just this write-up. Let's talk first.
Here are three terms to be familiar with for the purposes of this discussion:
Full Retirement Age (FRA): The age at which a Social Security Recipient is entitled to 100% of his/her primary insurance amount (PIA) - essentially, the full amount to which you are entitled. (However, delaying benefits beyond the FRA increases the amount received by 8% for each year delayed, up to a maximum increase of 32% at age 70.) For those born after 1954, the Full Retirement Age increases by 2 months for each year, up to a maximum of age 67 for those born in or after 1960.
File and Suspend: Activating or "opening" your own Social Security record at Full Retirement Age, but not actually claiming your own benefit. This allows a spouse to claim on your record while your own benefits continue to increase by 8% per year until they reach their maximum at age 70. This does not reduce your benefits or your spouse's own future benefits on their record.Restricted Application: An application filed in order to receive benefits based on your spouse's (or former spouse's) record, while allowing your own benefits to increase until their maximum at age 70. This does not impact benefits you will receive on your own record or the amount of benefits your spouse will receive on his/her own record.
The File-and-Suspend and Restricted Application options were often used in conjunction by couples to maximize their expected lifetime Social Security benefits. The ability to use these options in the future has been seriously curtailed by the Bipartisan Budget Act of 2015, although there is still a window of opportunity for those who are or will turn 66 by April 30, 2016 and who are not locked into a Social Security benefit yet.
THESE CHANGES WILL NOT AFFECT BENEFITS YOU ARE CURRENTLY RECEIVING.
So, with that background information, what does this mean for you? Broadly speaking and for purposes of this discussion, we can classify people into one of two groups:
Group 1: Cases where you don't have a critical, time-sensitive decision to make - either because you've already settled on your Social Security decision or because there is nothing you can do about the changes. This group includes:
- Singles already receiving benefits (no effect on benefits at all)
- Marrieds where both are already receiving benefits (no effect on benefits at all)
- Singles or marrieds, with an individual birthdate (if single) or both birthdates (if married) after April 30th, 1950. (In this case, the new law has an effect on available claiming options, but there is nothing that you can do about it).
- Those in Group 1 whose birth date is between April 30th, 1950 and December 31st, 1953 will lose the file-and-suspend option, but can still file a restricted application for spousal benefits at age 66. There is, however, no time-sensitive deadline here. Those attaining age 62 by the end of 2015 -- i.e., those born on or before January 1st, 1954 -- will lose the both the file-and-suspend and the restricted application options. Unfortunately, there is nothing to do in these two cases other than update / adjust retirement income plans AND, very importantly, to still make the best decision you can at Social Security claiming age given the options that are on the table at that time (and this might include filing a restricted application at age 66 for those born prior to 1954).
Group 2: People who have a time-sensitive, very important decision to make by April 29th, 2016:
- This includes anyone born on or before April 30th, 1950 (that is to say, those who will have turned 66 by April 30th, 2016) AND who has not yet started benefits (or not yet implemented a file-and-suspend strategy). This is the group which still has a short window to file-and-suspend, if it makes sense to do so, but that window closes after April 29th, 2016. Although, technically, this deadline applies to both singles and married couples, it's a much bigger issue for married couples.
ACTIONS YOU NEED TO TAKE
If you are in Group 1, and haven't started benefits yet, make sure you do a thorough analysis of all available options prior to making your Social Security claiming decision. If you are in the Social Security claiming window (age 62 - 69), haven't started benefits yet, and would like to visit or revisit the options available to you, I am happy to help.
If you are in Group 2 - essentially anyone born before April 30th, 1950 AND you have not yet started benefits - ESPECIALLY IF MARRIED - call or email so we can discuss the best options well prior to the April 29th, 2016 filing date.
I hope this provides some clarity around what I know is a hugely confusing and complex topic. Feel free to forward this link onto anyone who you think might be affected by these changes, and of course, please don't hesitate to call or email with any questions you might have.
- The actual value of the best vs. worst Social Security claiming decision can be much larger than $64,000. In some cases - married couple, maximal lifetime earnings for both, and very long life expectancies, it could be as much as a $414,000 decision, not even including inflation adjustments. However, the elimination of the file-and-suspend/restricted application combination for people born after April 30, 1950, has the potential to reduce lifetime benefits by about $64,000.
- A person actually reaches a particular age on the day before the anniversary of their birthdate. See this related link from the Social Security Program Operating Manual for the rule regarding birtdates falling on January 1st.
- Although the file-and-suspend birthdate cut-off for turning 66 is April 30th, 2016, the 30th falls on a Saturday so the 29th will be the last day to actually file-and-suspend for those who are eligible.