There has been much buzz about Social Security recently—and with good reason.
Section 831 of the Bipartisan Budget Act contains the first major change to Social Security claiming rules since the Senior Citizen Freedom to Work Act in 2000. Finding out who is affected and what they need to do is a challenge. The Social Security Administration sent an emergency message to its field offices in February explaining how its employees should implement the changes. The staff in SSA field offices are still trying to get up to speed. Adding to their confusion is the fact that Social Security policy prohibits its agents from giving advice on claiming strategies.
The Budget Act was signed into law in November 2014 but has a six-month grace period during which certain folks can still take advantage of the old rules. Social Security has not firmed up these dates, but the best information available suggests that effective April 30, it will no longer be possible to file for benefits and immediately suspend those benefits — a strategy commonly referred to as “file and suspend.” (More on that strategy later.)
The other strategy being eliminated is “restricted application.” This will no longer be an option for beneficiaries born after Jan. 1, 1954. In short, this strategy involves claiming a spousal benefit between ages 66 and 70, thereby allowing your benefit to grow until age 70. At 70, you switch to your own benefit.
If you were born on or before April 30, 1950, you are still eligible to file and suspend. If you already have a suspended benefit, you will not be affected by the change. There are a few reasons why you may want to take advantage of this before April 30.
How These Strategies Work
First, filing and suspending allows your monthly income to grow by a certain amount every year. This is referred to as Delayed Retirement Credits. The kicker with the file and suspend strategy is that if you decide at any point between your full retirement age (FRA) and 70 that delaying your benefits was a bad move, you can request a lump sum of the benefits you missed out on by not claiming at your FRA. This may make sense if you were planning on working until 70, but were unexpectedly laid off and suddenly need that income. Second, filing for a benefit allows eligible beneficiaries to claim a spousal benefit.
Let’s say you want to continue to work, but your spouse didn’t work long enough (10 years or 40 quarters) to qualify for his/her own benefit. You can file and suspend, which would allow you to continue to work, earn delayed retirement credits, and enable your spouse to take half of your full retirement age benefit (PIA). This can also be a nifty strategy for those 66 or older who have minor children because filing and suspending will allow those children to claim a benefit until they turn 18.
The restricted application is often used in conjunction with the file and suspend strategy. It usually makes sense for couples with similar benefits, as illustrated by the following example:
- John and Jane are married.
- John: Age: 66
- SS Benefit (PIA): $1,500/m
- Jane: Age: 64
- SS Benefit (PIA): $1,000/m
In this scenario, Jane could file a restricted application for spousal benefits in two years at age 66 and would receive $750/month (half of John’s PIA). This would allow her benefit to grow by 8% over the four years that she collects a spousal benefit. At 70, she would switch back to her benefits based on her own earning record. At that point, she would receive $1,320/month (8% growth every year for four years = $1,000 x 1.32). Here is the catch: John would have to file for benefits in order for Jane to take advantage of this strategy. If John, too, wants to let his benefit grow until age 70, he can file and suspend, but must do it before April 30.
Considering Your Options
The restricted application and file and suspend claiming strategies are now being called “unintended loopholes” by the Social Security Administration, exploited by financial planners and attorneys and the clients they represent. As one of the former, I can confirm that we do use these strategies for most of our clients. By the way, anyone — regardless of his or her wealth — can put these strategies to work.
At this point we are scrambling to make sure that our clients are considering this advice. At our most recent class, a client told us that it took her three months to get an appointment at her local SSA office. The good news is that these strategies can be implemented by phone, at SSA.gov, or in your local office.
Prior to these changes, there were 567 (not a typo) different ways to claim Social Security benefits. There is no way in this column to cover every scenario or even touch on everyone affected. If you think you may be impacted and don’t know what to do, you can contact your financial planner. If you don’t have a financial planner or he or she doesn’t offer Social Security advice, you can consider seeking out one who does. You can ask a planner run the optimal scenario and give you the language to take to SSA.
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