A couple months ago, I wrote a blog on Social Security which highlighted a couple things. One – historically Congress has been inclined to expand Social Security benefits rather than reduce them. Two – without any changes to Social Security, folks receiving disability benefits were going to see payments cut by as much as 20% as early as 2016. I suppose Congress has been reading our blogs because here we are sixty days later on the heels of a budget bill that both reduced Social Security benefits and shored up funding for Social Security disability. I am humbled by my power and influence.
Before I get into the details of this bill, let me start by saying one very important thing: nothing is changing for people who have already filed for Social Security. The changes going into effect 6 months from now will only impact claiming strategies for future beneficiaries. To understand the impact, we first need to understand the basic rules of filing for benefits as they currently exist.
Individual Benefits – Benefits You Earned
Individuals who work and pay Social Security tax for 40 quarters are eligible to receive Social Security benefits on their own working record. You can begin taking benefits as early as 62 and delay them up to 70. The longer you wait, the higher your monthly benefit. A worker might receive $1,500/mo. in benefits at 62 and $2,800/mo. at 70. Most Social Security decisions revolve around this tradeoff – should you forego benefits now for higher benefits later or vice versa?
Dependent Benefits – Benefits Someone Else Earned
Spouses, ex-spouses, widow(er)s and children could all be entitled to benefits, whether or not they ever worked or paid into Social Security themselves. Let’s look at two common examples of how this plays out in a married couple.
Imagine a husband and wife, Adam and Jane. Adam has worked enough to qualify for Social Security benefits of $2,000/mo. starting at 66. Jane was a homemaker and does not qualify for Social Security based on her own work history. Despite the fact she never paid into the system, Jane is still entitled to a spousal benefit of 50% of what Adam gets: $1,000/mo. As a couple, they receive $3,000 a month.
Now, let’s assume Adam and Jane both worked. Adam still has a $2,000/mo. benefit; Jane now has her own benefit of $1,500/mo. They also both qualify for spousal benefits. Adam’s 50% spousal benefit would be $750/mo. and Jane’s spousal benefit would be $1,000/mo. Social Security will automatically pay them the higher of the two benefits they are eligible for; one or the other, not both. In this case, Adam and Jane would get their individual benefits and receive a total of $3,500/mo.
Maximizing Benefits – Individual & Spousal Combined
From here, it starts to get complicated. Or should I say, more complicated?
Remember, filing for Social Security is all about the tradeoffs: higher benefits later mean giving up benefits now. For the past 15 years, the “file and suspend” and “restricted application” claiming methods have enabled married couples to mitigate that tradeoff.
Back to Adam and Jane. At 66, Jane files a restricted application saying “I don’t want my $1,500/mo. benefit; I only want my $1,000/mo. spousal benefit.” She starts getting $1,000/mo. checks. For the next 4 years, her $1,500 benefit grows 8% per year to an ultimate value of $1,860/mo. At 70, she goes back to Social Security and says “I’d like my $1,860/mo. now” and they switch her from receiving benefits as a spouse to receiving benefits on her own.
Adam also goes to Social Security at 66. He files to receive his $2,000/mo. benefit (which he has to do in order for Jane to get the spousal benefit on his record). He then immediately suspends his benefits, which stops Social Security from sending him checks. He allows his benefit to grow until age 70 when he receives $2,480/mo.
This is one way couples have used the “file and suspend” and “restricted application” rules to eke out additional funds from Social Security – in this case at least an additional $48,000. While publicly popular claiming strategies, lawmakers looked unfavorably upon what they perceived to be loopholes in the law. Facing skyrocketing Medicare Part B premiums and an underfunded disability fund, lawmakers chose to eliminate these strategies and use the money to stave off premium increases and benefit cuts.
What Does this Mean for You?
If you are under age 62: There is no action required by you. These strategies will not be available to you when you file for benefits; however, we have not factored them in your planning so this should not materially change your retirement plans.
If you have already filed for Social Security: There is no action required by you. There will be no changes to your benefits, even if you have filed using one of the eliminated strategies.
If you are between 62 and 70 and haven’t yet filed for benefits: Now is the time to review your filing strategy. There is a 6-month window of time during which singles and married individuals may still “file and suspend” their benefits. If you are considering this strategy, we encourage you to review your situation as soon as possible as we expect there will be a high volume of filing activity at Social Security offices over the coming months. The “restricted application” option will continue to be available over the next 4 years for individuals over the age of 62 by December 31, 2015.
It is highly unlikely that the success of your financial plan hinges on using either of these claiming strategies. That being said, there remains a short window of opportunity for some to maximize their Social Security income by using these techniques. If you fall in that group, Jeannette, Chip and I will be reaching out to you to discuss your options. We are also available, as always, to address any questions or concerns you may have about this or any other aspect of your plan.