The Bipartisan Budget Act of 2015 was signed into law on November 2, 2015. The act first and foremost raised the federal debt limit, preventing a default on our National Debt. However, there are many other items of note in the act, including a provision that avoids a huge increase in Medicare Part B premiums for those not protected under the Social Security Hold Harmless rule.
One of the most surprising provisions of the law dramatically changes the landscape of Social Security Planning. Section 831 of the legislation titled, “Closure of Unintended Loopholes,” eliminates a powerful strategy called “restricted application” for many taxpayers. It also deflates another powerful strategy called “file and suspend.”
Changes to “restricted application”
The legislation expands Social Security’s Deemed Application rule. The Deemed Application rule provides that, when you are eligible for both a benefit from your own work history, and a benefit from your spouse’s work history, you are deemed to have filed for both.
Prior to the passing of the legislation, the deemed application rule applied only to those who filed for benefits prior to full retirement age. After the passing of the legislation, it applies to all (except those noted below), including those who file for benefits at or after their full retirement age.
What does this mean?
The legislation strips away the powerful strategy of filing a “restricted application” at full retirement age for just spousal benefits, while deferring your personal benefits, allowing them to earn eight percent delayed retirement credits each year up to your age 70.
This strategy can increase your monthly benefits by up to 32 percent. Under the new law, you can still defer benefits, but you would not be able to collect spousal benefits at the same time.
Who does the change affect?
The new rule applies to anyone who attains age 62 after 2015. Thus, the ability to leverage “restricted application” is alive and well for anyone who attains age 62 prior to 2016.
Changes to “file and suspend”
The new legislation takes much of the air out of another strategy called “file and suspend.” The legislation stipulates that if you voluntarily suspend your benefits no one can receive benefits based upon your suspended record.
What does this mean?
Traditionally, the “file and suspend” claiming strategy permitted you to file for your own benefits at full retirement age or later, and then suspend the checks in order to receive the 8 percent delayed retirement credits.
At the same time, since you have filed, it permitted your spouse and/or children to claim benefits from your record. Under the new law, you can still suspend your benefits at full retirement age or later, but your spouse and/or children would be prohibited from receiving benefits from your suspended record.
Who does the change affect?
This new law applies to requests for benefit suspensions submitted after a 180 day grace period from the effective date of the legislation. Thus, the full benefits of “file and suspend” are alive and well only for a short period of time.
You have until April 29, 2016 to take advantage of this strategy. After this date, the opportunity will cease to exist. This creates urgency to take advantage of this strategy before it becomes unavailable.
Taxpayers who will reach their full retirement age of 66 on or before April 29, 2016 should evaluate their options, before their options become more limited. Unfortunately, those who reach their full retirement age after April 29 are out of luck.
Breaking it down:
1. Younger than 62:
These changes reduce the overall value proposition of Social Security for the younger generation. Those who will be under the age of 62 on December 31, 2015 will neither have the ability to utilize “restricted application,” nor the ability to take full advantage of “file and suspend” as Social Security maximization strategies.
They should realize that Social Security will likely be a smaller portion of their income in retirement, and should plan accordingly.
2. 62 years old, but not 66 by April 30, 2016:
Those who will attain age 62 prior to 2016 will have “restricted application” available to them, but if they do not turn 66 before April 30, 2016, they will lose the ability to leverage the full power of “file and suspend.” A comprehensive evaluation should be done for those in this age group to determine if “restricted application” can bolster income in retirement.
3. 66 years old by April 30, 2016:
It is only those who turn 66 before April 30, 2016 that have the power to leverage the full benefits of both “file and suspend” and “restricted application.” However, if they do not take advantage of “file and suspend” before this date, they will lose an opportunity forever.
A comprehensive evaluation should be done for this group to determine if one or a combination of these strategies can increase income in retirement.
At the end of the day, Social Security has proven to be a linchpin of most Americans’ retirement income plans. The new law obviously dampens the expectations of what we can expect from Social Security.
However, with the demise of the defined benefit plan, Social Security remains one of the only sources of inflation-adjusted retirement income that we can count on to last as long as we live.
The combination of lower expectations from Social Security coupled with the demise of the defined benefit plan places a heavier burden on us to leverage our personal assets to create income in retirement that will last as long as we do.
It is crucial that a thorough evaluation of Social Security claiming strategies be done as part of any comprehensive retirement income plan in order to provide the best results in retirement. The difference between a poor strategy, and a well thought-out strategy can be hundreds of thousands of dollars in retirement income.