Social Security is an important part of retirement. For many retirees, Social Security income makes up a significant part of their retirement income.
For younger people, the question of whether Social Security will be around by the time they retire is a major concern. Depending on whom you listen to and what you read, the numbers vary. However, most will agree that over time, changes will need to be made.
While some changes may be difficult to make, others can be easier, as evidenced by recent news coming from Congress in late 2015.
The Bipartisan Budget Act of 2015, passed on November 2, 2015, contains two major changes affecting Social Security. The rules on filing a restricted application for spousal benefits, and the ability to file and suspend, have changed substantially.
For many, the details of these changes are beyond the scope of this post. This post is intended to briefly detail who is affected by these changes and what these changes mean. In short, these changes to Social Security have the following impact:
If you are under age 62:
Those under the age of 62 as of December 31, 2015 will not be able to use the Restricted Application or File and Suspend as Social Security maximization strategies. If you fall into this category, you should be prepared for Social Security to comprise a smaller portion of your income during retirement.
If you are age 62 or older:
Those who will reach the age of 62 before 2016 will have the Restricted Application available to them.
If you are age 66 and older:
Those 66 or older, or those who turn 66 before April 30, 2016, can leverage the full power of the Restricted Application and File and Suspend. However, if you do not take advantage of File and Suspend by April 30, 2016, you will permanently lose the opportunity to do so.
To better understand what these changes mean, a deeper exploration of the rules of Social Security is necessary.
What is the Restricted Application?
As a spouse, you are entitled to a Social Security benefit that is equal to your earned benefit based on your retirement credits or a benefit that is equal to ½ of your spouse’s benefit – whichever is higher. These two options were seemingly independent of one another.
But in fact, they weren’t!
Prior to the new rule, a strategy existed that allowed one party of a married couple to collect on the benefit of the other party while continuing to defer their own benefit. This strategy effectively allowed for “double dipping” from the system. Specifically, an individual who was eligible for both a spousal benefit on the work record of a spouse and a retirement benefit based on his or her own work could choose to elect only the spousal benefit at Full Retirement Age.
By electing only a spousal benefit, the system allowed his or her own benefit to accumulate 8%-per-year Delayed Retirement Credits, and an individual could then switch to his or her own larger benefit at any point up to age 70.
Based on the new law, for those born on Jan. 2, 1954, or later, an application for retirement benefits or for spousal benefits will automatically trigger entitlement to the other benefit. Basically, this removes the option for a restricted application
What is a Voluntary Suspension?
A voluntary suspension of Social Security benefits allows a retiree to start and suspend their Social Security benefits on the same day. By doing so, the spouse of the retiree who started and suspended would be eligible to collect a spousal benefit. This voluntary suspension had several advantages, including:
- Allowing the retiree who started and suspended to earn 8% deferral credits
- Allowing the spouse to earn deferral credits on their personal benefit
- Allowing the spouse to collect additional income from Social Security when the spousal benefit maxed out (spousal benefits do not benefit from the 8% deferral credits)
The changes to the law effectively eliminate this option. Upon the voluntary suspension of a retiree benefit, all benefits being paid that are tied to that benefit are also suspended. The new law also eliminates the ability to request a retroactive lump sum (this option allowed you to defer your Social Security, and then undo it, if you were so inclined, and receive a lump sum of all missed payments).
What Do These Changes Mean?
The rising popularity of these options leads to additional dollars being paid out of the system. As the crunch on Social Security continues, I fully expect Congress to take additional measures to ensure the longevity of Social Security. These actions remove benefits that were/are being paid that may work against the original intention of the program.
While the cynic may say that this is simply our government at work again, cheapening the system, I believe these actions are consistent with the true intention of the system.
How Will This Affect Your Retirement?
At the end of the day, these changes mean less potential dollars from Social Security. All else being equal, less money being paid out from Social Security means a greater responsibility for a retiree to save more before retirement or spend less in retirement.