Making sense of changes to Social Security

The recent Bipartisan Budget act included provisions to close what were deemed ‘loopholes’ within Social Security strategies.  Here’s a quick breakdown of what changed:

• Section 831 (a) – anyone who files for any benefit is deemed to have filed for all benefits.
• Section 831 (b) any benefits for an auxiliary (spousal payments) must be stopped when primary suspends.

(summary/bolding mine) The bill itself can be found here.

What it means to you

Firstly, there are two different strategies that are discussed when we look at Social Security planning.  They are often confused or mixed up, so let’s start with defining them:

Voluntary suspension (File and Suspend)

This can only be done when the person reaches Full Retirement Age (FRA) which is set by the IRS depending on your date of birth, it ranges from 65 to 67.  Check yours here.

When you file and suspend, you do apply for benefits, but elect to not accept the payments until later.  The amount of your benefit grows at an 8% rate per year between FRA and 70.  This strategy was attractive as not only did it apply to the primary, but also survivor (Widow) benefits.

Restricted Application

In this case, the individual does not file for his own benefits, instead, they file to apply for access to their spousal benefits only.

Why the difference?

The primary advantage of filing for their own (file and suspend) is that it allows the spouse to claim spousal benefits based on the primary earner.

Example:

Tom would file and suspend.  Toms payments would continue to grow at 8% until age 70, and Jerry would file a restricted application, to claim the spousal amount of Tom, plus defer her own benefits until 70.  At 70, both would have boosted their monthly payments considerably, AND in the interim, they would have received income via Jerry receiving payments as a spouse.

In short, the restricted application election was allowed because Tom filed and suspended (the act of filing is distinct from suspending, and allows the ability for Jerry to claim the spousal).  It’s that last part, where they can claim income while waiting til 70 that is at risk from the changes in legislation.

Why the history lesson?

It’s important to note that File and Suspend and Restricted applications are not the same, because, moving forward with the new legislation, File and Suspend is removed first, and Restricted Application is phased out a little longer, per below:

Single filers

If you were born on or before May 1st 1950 and if the file and suspend strategy is best for you then you need to apply for file and suspend before April 30th 2016 in order to fall under the old rules.  Per above explanation, restricted applications are not allowed for single filers (by logic, as they refer to the spouse!)

Married filers

1. Born on or before May 1st 1950: Can file and suspend (if appropriate) and access restricted application.  File and suspend election must be made prior to April 30th 2016.
2. Born between May 2nd 1950 and Jan 1st 1954: File and Suspend will result in the spousal payment being suspended also (IE for the Tom and Jerry example, Jerry couldn’t earn from Tom while both deferred) however.. restricted applications are still available.
3. Born or after Jan 2nd 1954 – File and Suspend means no spousal payments, and no ability to file restricted applications.

Divorcee’s are in a similar position to Married filers per the rules above, with the key dates per point number 2.

Changing plans

Those in point number 2 are where most strategies may pivot.  For example, they cannot leverage file/suspend elections, but we could still create a value add by having one spouse claim (perhaps even prior to FRA, depending on circumstances) and the other filing a restricted application.  The benefit of this is that as a couple, they receive ‘some income’ during those dry years until 70, and at 70, the suspended benefit kicks in.

Of course, everyone has a different personal situation, so you need to run your own analysis, but if you are in (or very near) the age brackets discussed here, I would recommend taking a very close look at the impact of your options.