By Mary Beth Franklin
The day after I discussed Social Security rules and claiming strategies at the National Pension Education Association’s annual meeting in Lexington, KY, on October 27, 2015, the U.S. House of Representatives, without advance warning or public debate, approved legislation that eliminated some of those options.
The Senate approved the bill two days later and President Obama signed the Bipartisan Budget Act of 2015, which includes the new Social Security claiming rules, into law on November 2. Now, only a select group of retirees will be able to exercise these valuable claiming strategies before the door shuts forever.
First, let me stress that no one who is currently collecting Social Security benefits will be affected by the prospective changes to rules determining who can file and suspend Social Security benefits. This claiming strategy allows a spouse or dependent minor child to collect benefits while the wage earner’s retirement benefit continues to grow up until age 70.
Second, as of early December, the Social Security Administration had not issued any official guidance on the new rules. Consequently, industry experts are left to interpret the effective date and nuances of the new regulations.
It appears that April 30, 2016, is the deadline for new requests to file and suspend under current rules. That includes anyone who turns 66 by May 1, 2015, as those born on the first of the month are eligible to claim Social Security benefits in the prior month.
Separately, anyone who is 62 or older by the end of 2015 (including anyone born on January 1, 1954 or earlier) retains the right to claim only spousal benefits when they turn 66. This strategy of filing a restricted claim for spousal benefits allows them to collect benefits worth half of their spouse’s full retirement age amount while allowing their own benefits to accrue delayed retirement credits of 8% per year up to age 70. At 70, they would switch to their own retirement benefit which would be worth up to 132% of their full retirement age amount.
Here’s a sample of some of the questions I have received since the new legislation was passed.
Q: I have married clients where both the husband and wife turn 66 in April 2017. Their plan was to have the husband file and suspend at 66 to trigger a spousal benefits for his wife while his own retirement benefit would continue to grow up until age 70. At 66, the wife planned to file a restricted claim for spousal benefits and switch to her own larger benefit at 70. Can they still do this?
A: No. Because both the husband and wife miss the April 30, 2016, deadline, neither of them can file and suspend their benefits when they reach full retirement age in April 2017 to trigger spousal benefits for the other. They both meet the cutoff of attaining age 62 by the end of 2015 that allows them to file a restricted claim for spousal benefits, but only one of them can do so. It would make sense for the lower-earning spouse to claim Social Security first and to have the higher-earner spouse claim spousal benefits at 66. The would allow the higher-earning spouse’s benefit to continue to grow by 8% per year up to age 70, locking in the maximum retirement benefit as well as the maximum survivor benefit for whichever spouse remains after the death of the first one.
Q: My wife is four years older than I am and doesn’t have 40 quarters of Social Security credits so she is only eligible for spousal benefits. I just turned 62 and continue to work. What are my claiming options?
A: That’s a tough one. You are too young to be grandfathered under the existing file and suspend rules. That means you actually have to collect Social Security in order for your wife can claim a spousal benefits. But if you claim benefits now and continue to work, you could forfeit all of your benefits—as well as the spousal benefits that your wife collects—if you earn too much above the 2016 earnings cap of $15,720. You’ll probably have to wait until you turn 66 when the earnings restrictions disappear to claim Social Security and to trigger spousal benefits for your wife. Although your wife would be 70 at that point, the maximum spousal benefit is still based on half of your age 66 benefit. Spousal benefits do not earn delayed retirement credits.
Q: How do the new rules affect divorced spouses?
A: Ex-spouses are subject to the same grandfather provision as married couples. As long as you are 62 or older by the end of 2015, you retain the right to claim only spousal benefits when you turn 66, allowing your own retirement benefit to continue to grow up until age 70. Those who are younger than 62 by the end of 2015 lose the right to claim spousal benefits only. That means when they claim Social Security, they will be paid the highest benefit to which they are entitled, whether on their own earnings record or as a spouse. They will no longer be able to choose which benefit to collect.
Q: Are there any changes to survivor benefits rules?
A: No. Surviving spouses who are also entitled to both retirement benefits on their own earnings record can still choose to claim survivor benefits first and switch to their own retirement benefits later, or vice versa, if that would result in a larger benefit.
Q: Will people who file and suspend in the future still be able to request a lump sum payout of suspended benefits?
A: No. Anyone who files and suspends on or after May 1, 2016, will no longer be able to request a lump sum payout of suspended benefits.
Mary Beth Franklin is a Contributing Editor at Investment News, a leading publication for financial advisers. She is also a Certified Financial Planner and a frequent public speaker addressing both consumers and financial professionals.
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