Congress passed a budget bill in late October that included important changes to Social Security benefit claiming strategies. The bill was sent to the White House, and President Obama signed it into law November 2.
Read on to learn about the new rules and how they may affect you:
File and Suspend
For years we have been helping clients optimize their Social Security benefits by analyzing their options and helping them choose the strategy that best works with their financial plan. Often this has included utilizing the “file and suspend” and “restricted spousal benefit” options.
The new bill will put an end to the “file and suspend” strategy, which allowed spousal benefits to be paid while earning delayed retirement credits for the other spouse. The new legislation requires that you must be receiving your own benefit in order for a spouse or child to receive a benefit based on your earnings record. It goes into effect six months from the signing of the bill (4/30/2016). You will still be able to suspend your benefits at full retirement age (if you have already filed previously) to allow your benefit amount to increase.
For those of you who are already using this strategy, we understand as of today that nothing changes. If you were born before 4/30/1950, you still may be able to file and suspend during the six-month grace period beyond the effective date of the legislation. If you are in this situation, contact your advisor to discuss your options and if any action is needed on your part.
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“Deemed Filing” Rule
The new law also makes changes to the “deemed filing” rule, which has only been a factor when filing for benefits before reaching full retirement age. The old law stated that anyone filing for any benefit before full retirement age would be paid the higher of the spousal benefit or their own benefit. But if they waited until full retirement age, they could choose which benefit they would receive.
The new law now applies “deemed filing” to age 70, which means that the benefit payable will always be the higher benefit if you are eligible for more than one.
The new legislation also eliminates the use of the “restricted application.” A restricted application allowed a spouse who had reached full retirement age and was eligible for their own benefit and a spousal benefit to choose to collect only the spousal benefit and allow their own benefit to continue to grow. Later (usually at age 70), they would change over to their own higher benefit amount.
There is some good news. The new rule on restricted applications will only apply to those who turn age 62 in 2016 or later. So anyone age 62 or older before the beginning of 2016 will still be able to file a restricted application for spousal benefits at full retirement age.
Benefits for Widows and Widowers
Rules for widow and widower benefits appear not to have changed. A widow or widower will still be allowed to start widow benefits and switch to their own benefit later.
Those currently collecting Social Security benefits on their own earnings record will see no changes.
Anyone born in 1953 or before may still be able to take advantage of some of the existing claiming strategies for a limited time. If you were born in 1954 or later, the above-mentioned strategies will no longer be available to you under the new law. If you are 65 as of today and you will be 66 by 4/30/2016, you may need to act now.
The good news is that these changes are a first step to improving the health of Social Security for the long term.
While Social Security claiming options are soon to be fewer than they were before this law is scheduled to take effect, there are still strategies worth investigating that could add thousands of dollars to your lifetime benefit amount. As always, you should consider these strategies as part of your overall financial plan and not as an independent decision.