You have probably heard about the changes coming to Social Security May 1, 2016. There seems to be some misconceptions and misrepresentations about these coming changes. Whenever there are changes like this, there always seems to be some unscrupulous financial professionals and financial services companies taking advantage of the situation for financial gain.
Some of these opportunists have falsely claimed that these changes to Social Security “will fundamentally affect core benefits” or that you have to protect yourself from the “hidden radical reform that threatens the financial security” of millions of Americans. As designed, these scare tactics convince many unsuspecting investors into purchasing unneeded and costly financial products, services and newsletters.
The truth is that the core Social Security benefits have not changed. What has changed are some strategies that allowed certain Social Security recipients to maximize their benefits over and above the core benefits or to get retroactive lump sum benefits.
These new changes were tucked away in the Bipartisan Budget Act of 2015 that was passed by Congress and signed into law by President Obama late last year. In the Act, there were three Social Security benefit strategies that were banned, File and Suspend, Restricted Applications and Retroactive Lump Sum Benefits.
File and Suspend
With the file and suspend strategy, you could file and suspend your benefits in order to get additional benefits for you and your spouse or other qualifying family member. With this strategy, when you reached full retirement age (currently 66), you would file and immediately suspend your Social Security benefits, which then grew at 8% per year until age 70. Your spouse or other qualifying family member could then apply for and receive Social Security benefits based upon your earnings record while your benefits were suspended. At age 70, you then would unsuspend your benefit and receive your, now greater, benefit.
After May 1, 2016, you will no longer be able to file and suspend your benefits and have your spouse or other qualifying family member receive benefits based on your earnings record. However, if you will reach full retirement age of 66 on or before May 1, 2016, you are grandfathered in under the old rules and will still be able to file and suspend so long as you do so on or before April 29, 2016.
If you are born after May 1, 1950 or you file for Social Security benefits after April 29, 2016, your spouse or other qualifying family member can only receive benefits based upon your earnings record if you are currently receiving benefits, not if your benefits are suspended. You can still file and suspend your benefits. But if you do, your spouse or other qualifying family member cannot receive benefits based upon your earnings record.
Restricted Applications
Under the current rules, when you reach full retirement age (currently 66), you could apply for spousal Social Security benefits and defer your own benefit which grew at 8% per year until age 70. At age 70, you then could switch to receiving your own, now greater, benefit.
Under the new rules, you must be age 62 or older as of January 1, 2016 in order to file a restricted application at full retirement age. If you were born January 2, 1954 or later, you are no longer eligible to file a restricted application. You will now fall under the “deemed filing” rule.
With the deemed filing rule, if you file for benefits after reaching age 62, you are deemed to have filed under your own benefits. Your monthly Social Security benefit would be the larger of either your benefit or your spousal benefit. And once you start receiving a benefit, you cannot switch choices. You can no longer defer your benefits, receive spousal benefits until age 70 and then switch to your own, then greater, benefit.
Retroactive Lump Sum Benefits
The retroactive lump sum benefit option worked like this. When you reached full retirement age (currently 66), you could apply for and suspend your Social Security benefits. You later could unsuspend the benefit and claim all benefits due since filing and receive them as a lump sum. You would then forfeit any delayed benefit credits and your monthly benefit would be what you would have received when you originally filed.
This was a great strategy to use if you had a major health change or a financial emergency. After May 1, 2016, you will no longer be able to file and suspend, and receive retroactive lump sum benefits when you unsuspend. However, if you will reach full retirement age of 66 on or before May 1, 2016, you are grandfathered in under the old rules and will still be able to file and suspend and receive retroactive lump sum benefits when you unsuspend, so long as you file and suspend by May 1, 2016.
If you are born after May 1, 1950 or you file and suspend after May1, 2016, you will no longer be able to receive retroactive lump sum benefits when you unsuspend. Under the new rules, you will only start receiving your monthly benefits at a higher level based upon your delayed benefit credits.
Planning Strategies
With these changes, what can you do? Many financial advisors say that it is back to retirement basics. Since August 14, 1935, when president Roosevelt signed the Social Security Act into law, Social Security was always meant to be a supplement and not the main source of retirement income. You should be putting money aside in savings, IRAs and 401(k)s to assure that you have a comfortable retirement.
If you are in good health, many financial advisors would recommend that you do not apply for early Social Security benefits, but wait until your full retirement age (currently 66). If you think that you will make it to age 83, you would be further ahead taking the higher benefit at full retirement age. However, if you are not in good health and have a shorter life expectancy, filing at age 62 may be a better choice.
While these changes are significant, they do not change how Social Security core benefits are calculated. Go to a qualified financial professional and have them run the numbers. Find out what makes the most sense to you.
By: Matthew M. Wallace, CPA, JD
Published edited February 7th, 2016 in The Times Herald, Port Huron, Michigan as: Social Security Benefit Strategies Banned