With the passage of the bi-partisan budget bill in Fall 2015, major changes affecting Social Security were signed into law. The changes are geared to prevent duplicate or excessive benefit payments to high-income earners as well as to close unintended Social Security loopholes, leaving the system slightly more complicated. But there still are many strategies clients can use to maximize their benefits.
As an overall general rule, the new legislation prevents other family members from receiving a benefit if the worker was not actually receiving a benefit. It’s estimated that if everyone takes advantage of these new techniques outlined in the new law, it will save $9.5 billion.
Who Is Affected
Some Social Security recipients are grandfathered in under the new law. Those benefits claimed prior to the act will continue to be received as they currently are.
As for new benefits, there are three groups into which recipients can be classified.
- Least affected: Those born on or before May 1, 1950, and who will turn 66 before April 30, 2016, as well as those who already have begun receiving benefits.
- Somewhat affected: Those born between May 2, 1950, and Jan. 1, 1954, who will turn 62 by April 30, 2016.
- Most affected: Those born on or after Jan. 2, 1954, who will turn 62 after April 30, 2016.
Changes to Filing Options
There are various filing options that will be affected by the new law that we will delve into, as they affect workers, spouses and other family members differently.
“File and Suspend” worker option only: This option previously allowed a spouse and children to collect benefits while letting worker benefits earn delayed retirement credits on their own record. Recipients who want to file and suspend need to be full retirement age by April 30, 2016 (born on or before May 1, 1950).
Under the new law, those who already have used the “file and suspend” option or who apply within six months of the bill’s passage are allowed to continue this strategy. If a worker benefit is suspended after April 30, 2016, spousal, children’s and other dependent benefits also will be suspended.
The maximum reduction is $2,639 (maximum 2016 worker benefit) x 50% = $1,319.50 x 12 months = $15,834. Additionally, $15,834 x 4 years = $63,336 total benefit reduction.
“Voluntary Suspension” worker option only: This still exists, but under the new law will change what happens when benefits are suspended. At full retirement age, anyone still can voluntarily suspend benefits to earn delayed retirement credits.
If spousal or children’s benefits are being paid on the worker benefit, those benefits will be suspended under the new rules. If you are receiving benefits on someone else’s work record, those benefits will be suspended under the new rules.
This classification most likely will be used if someone filed early and determined that was a mistake.
“Restricted Application” spousal option only: This option previously allowed a spouse who has attained full retirement age, and who also was eligible for his or her own retirement benefits, to collect spousal benefits only while deferring their own benefits to earn delayed retirement credits.
Under the new law, the spouse will be able to receive spousal benefit only if the worker actually is receiving a benefit payment. If a worker has suspended their benefit, no spousal benefit is payable.
If you reached age 62 before 2016 (on or before Dec. 31, 2015), you have the option of filing a “restricted application” at full retirement age. This will be phased out over the next eight years.
If you reach age 62 in 2016 (after Dec. 31, 2015), you can never use “restricted application” at full retirement age. This option will be eliminated.
“Deemed Filing” and “Restricted Application”: Under the old law, prior to reaching full retirement age, if you applied for benefits, you were “deemed to be filing” for all available benefits and had no choice in the matter.
However, under the new law, those born on or after Jan. 1, 1954 (age 62 in 2016), deeming will be applicable regardless of age. This means the highest benefit always will be paid if a recipient is eligible for more than one.
Deemed filing kicks in whenever you are eligible for spousal or worker benefits if you are collecting the other benefit. Before the new law, deemed filing was applicable only when you were filing for benefits. In essence, previously deemed filing was done by you, where now it also can be done to you.
Ex-spouses and Widow(er)s: The ex-spouse benefits remain unclear with the passage of the bill. Looking at the new law, a person cannot file a “restricted application” for spousal benefits and switch to their own if not age 62 by Dec. 31, 2015.
What remains unchanged is that a person can file for widows benefits and then later switch to his or her own worker benefit at a later date, or vice versa.
Other Changes and What Remained the Same
One large change with the new law is that recipients no longer can backdate an application a total of six months. There is no retroactive payment going forward.
Additionally, those who suspend their benefits no longer can receive those suspended benefits in a lump sum payment.
One of two items that did not change with the passage of the new law is that earning delayed retirement credits of 8 percent up to age 70 remains in tact. Also, the do-over still remains.
Possible Strategies
There are several ways to go about applying for benefits now that the new law has taken effect. Some of them were applicable under the previous law, while others are new.
First, for the higher earner, it still makes sense to delay. The lower earner should take benefits in order for the higher earner to file a restricted application to take spousal benefits.
The lower earner also may want to claim spousal benefits before full retirement age if spousal benefits are greater than their own full benefit.
Equal earners may both delay, and it makes sense to delay benefits while continuing to work. Finally, you can draw down still on other retirement funds.
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