How to Handle Changes to Social Security Claiming Rules

If you were born in 1954 or earlier – essentially turning age 62 by the end of 2015, you are still permitted to file a Restricted Application at Full Retirement Age (age 66). Of course, to file the Restricted Application, your spouse must be either receiving Social Security benefits or having already executed a "File and Suspend".

In addition, this "deemed filing" will not apply to individuals filing for Survivor benefits who will still be eligible for claiming these benefits as separate from retirement benefits.   This allows widows and widowers the continued option to maximize benefits.  This, does of course, presume that the survivor has not already filed for their own retirement benefits.  The assumption is also that the benefit would be larger than the survivor benefit, since if not, there would be no reason to restrict and later switch.

File and Suspend

In regard to File and Suspend, the rules go into effect SIX MONTHS FROM EFFECTIVE DATE OF LEGISLATION – April 29, 2016.  An individual reaching age 66 by that date can continue to file and suspend until that time. By doing this, the person invoking file and suspend accomplishes two things:

• Delayed retirement credits continue to build for up to four years (to age 70) and
• Allows payment of spousal and/or children's benefits even though the filer's benefits are suspended

After April 29, 2016 – turn out the lights, the party's over – no one will be able to file and suspend to trigger a spousal benefit or to protect the rights for retroactive benefits.

However, there is one thing to be thankful for – in the original version of the legislation, those CURRENTLY collecting under file and suspend would have lost their benefits.  A last minute change to the bill provided a grandfathered provision protecting spouses and children ensuring that those currently receiving benefits before the effective date will continue to receive benefits. 

LONG-TERM EFFECTS AND STRATEGIES –WHAT'S LEFT TO DO?

The long-term effects of this legislative change remain to be seen. However, there are still things that wage earners can do to maximize their benefits in Social Security, including:

File and Suspend – For Those Who Can

• Because of the time-critical nature of these strategies, individuals who are eligible should consider taking advantage of the "file and suspend" strategies if eligible to do so within six months of November 2, 2015, enabling them to protect their options for the future. 
• Utilizing "file and suspend" before the rules change ensures establishment of a "claiming date" which allows an individual to, if necessary, file and request benefits back to the claiming date – protecting the cash reserve that has been built up (rather than a six month retroactive rule).

Restricted Application

• Individuals who are already 62 years of age or older still have the ability to utilize the Restricted Application strategy until age 66.

Other Benefits Remain

Remember that the "core benefits" of Social Security are unchanged by the Budget Act – the calculations for benefits for workers, spouses and survivors remain the same and there are no changes in the factors used to calculate benefits.  Some things to be considered include:

• Delayed Retirement Credits are NOT impacted by the legislation.  One continues to earn Delayed Retirement Credits if benefits are delayed past Full Retirement Age.
• The strategy of maximizing Surviving Spouse benefits by waiting to age 70 to earn the full 32 percent DRC remains, resulting in the surviving spouse (assuming that they made less) being able to collect maximum possible benefits.
• A higher income earner might still want to take benefits prior to age 70 to allow for collecting of spousal or children benefits at an earlier date.
• And, of course, both spouses can still wait until age 70 to file and earn the maximum amount of Delayed Retirement Credits on their own.

These changes happened suddenly and without public debate. Congress attached these changes upon emergency legislation to avoid a default on the federal debt and to avoid large Medicare premium increases. As noted above, the 2009 Report from the Center for Retirement Research estimated that the restricted application approach could cost the SSA over $9 billion per year if everyone used it, the Social Security Administration estimates that the elimination of these strategies will save approximately 0.02 percent of the 2.65 percent of taxable payroll.  The AARP supported the changes with the justification that it affected only a small group of retirees, noting that only one-tenth of one percent of all Social Security recipients utilized "file and suspend".  In a statement issued from AARP's Director of Financial Security and Consumer Affairs it was noted that "The claiming strategies impacted would apply entirely to future beneficiaries". 

Although the changes caught most Social Security beneficiaries – AND planners, off guard, there is at least some time to react. 

— Related on ThinkAdvisor:

• To Delay Social Security Claiming, Offer Lump Sum Benefit: Report
• Kotlikoff: 10 Ways to Maximize Social Security Benefits Under New Law