You’ve probably noticed that the government’s been making some changes to Social Security benefits.
To be more specific, due to the recent Bipartisan Budget Act of 2015, fundamental changes have been made to Social Security claiming strategies.
To be even more specific, this law mandated the end of restricted applications and the file-and-suspend strategy. As a result, many soon-to-be retirees are scrambling to understand the new rules.
Here’s what you need to know:
Although the elimination of restricted application and the file-and-suspend claiming strategy seemed to happen suddenly, they’ve been on the chopping block for several years. To understand why they were eliminated, let’s first look at what these strategies were in the first place.
Social Security Restricted Application
The restricted application allowed a beneficiary to apply for a single Social Security benefit, rather than all of the benefits they are entitled to.
Ordinarily, an application for any benefit is deemed to be an application for all benefits to which you are entitled. The restricted application allowed beneficiaries to apply for a single benefit (such as the Social Security spousal benefit) while still allowing the retirement benefit to continue to accrue delayed retirement credits.
For instance, as a beneficiary, you might be entitled to both a spousal benefit and a retirement benefit. If you were to apply for benefits without a restricted application, you would automatically receive the larger of the two. By filing a restricted application, you could receive just your spousal benefit, while allowing your retirement benefit to accrue delayed retirement credits to the tune of an additional 8% per year.
Social Security File-And-Suspend Strategy
The file-and-suspend strategy allowed you, as a beneficiary, to suspend your own retirement benefit, while allowing ancillary benefits (such as spousal benefits) to be collected by your family or dependents. In other words, your family could keep collecting benefits based upon your record even while your retirement benefits were suspended.
Why the Strategies Were Eliminated
These strategies were never intended to be used in these ways. Both strategies were created as part of the Senior Citizens’ Freedom to Work Act of 2000 to encourage retired Social Security beneficiaries to return to work. As the popularity of these strategies has increased, the Social Security Administration has grown concerned about the potential costs of the strategies.
Timeframe for the Rule Changes
In addition to the fact that these strategies have been eliminated, the blazing-fast timeframe for their elimination has also been quite controversial. As of April 30, 2016, the file-and-suspend strategy is gone — forever.
There is a somewhat longer phase-out time for restricted applications. Beneficiaries who reached age 62 on or before January 1, 2016, may file a restricted application at any point until they reach age 70. If you reached age 62 on January 2, 2016 or later, you cannot file a restricted application.
Social Security Spousal Benefits Are Still Available
Beneficiaries do need to remember that spousal benefits are still available for married couples (including same-sex couples), although the additional benefits will be less than they would have been under the old rules. In particular, the excess spousal benefit (ESB) can increase a lower-earning spouse’s benefit amount. The ESB is the benefit available to husbands or wives based upon their spouse’s earning record. ESB is calculated as follows:
ESB = 50% of your spouse’s full benefit – your full benefit
This formula means a higher-earning spouse will not receive an ESB, but a lower-earning spouse can receive a modest benefit based upon the higher earner’s record. For couples where one spouse significantly out-earned the other, this benefit can be a huge help.
Social Security Will Keep Changing
Like death and taxes, you can always count on changes to Social Security. That’s why it’s smart to prepare your retirement as if Social Security benefits are a bonus, rather than a major part of your post-retirement financial plan.
