Michele Griepentrog, CFA, CFP, CSSCS, Vice President & Senior Wealth Advisor
Social Security benefits are more confusing and complex than ever. Our Wealth Advisors are certified in Social Security claiming strategies, trained to assess and analyze the trade-offs of your options.
What Has Changed? Enacted into law on November 2, 2015, the Bipartisan Budget Act of 2015 accomplished several key objectives. The new law extended the nation’s debt limit through 2017, established federal spending limits for two years, avoided draconian across-the-board spending cuts (known in Washington-speak as “sequestration”), and sidestepped yet another threat of a U.S. Government shutdown. Also included were reforms to the Social Security Disability Insurance program to prevent impending cuts next year to disabled recipients and avoidance of a 50% increase in Medicare Part B premiums in 2016 for millions of seniors.
With virtually no opportunity for public comment or hearings, the new law also made significant changes to the Social Security program. These changes, which we discuss below, will impact lucrative claiming options used to increase Social Security monthly income for many married couples under current rules. Some popular strategies were eliminated with the passage of the new law and will become effective in 2016.
How Are Married Couples Affected?
“File & Suspend” and “Restricted Application” strategies were eliminated under the new rules. With a few notable exceptions, this change will primarily affect married couples, families and ex-spouses who are eligible to receive benefits on the primary worker’s record.
“File and Suspend” is a popular claiming strategy which allows a married couple to maximize their combined Social Security benefit. It is frequently integrated with a second strategy, “Restricted Application for Spousal Benefits”. This combination permits dual-income married couples to double dip, increasing the cumulative value of their Social Security benefit during retirement. Here’s how it works:
“File & Suspend” allows a worker to file at full retirement age for his or her Social Security benefit based on their own work record and then voluntarily suspend the benefit. When the spouse (usually the lower earner) reaches full retirement age, a “Restricted Application for Spousal Benefits” is then made. Delaying benefits based on their own work record after their full retirement age is rewarded with a permanent increase in their benefit amount called Delayed Retirement Credits (“DRCs”). This allows the spouse to begin receiving unreduced spousal benefits based on the primary worker’s record and also permits the records both spouses to continue to grow through DRCs. DRCs are equal to 8% per year up to the worker’s maximum age 70 under current rules. By age 70, the couple begins receiving their (much higher) Social Security benefit from their own work records as a result of the DRCs. Current Social Security rules allow a worker’s full retirement age benefit to increase by as much a 32% to age 70 as a result of DRCs.
Although not required to wait until full retirement age, applying at or after full retirement age allows couples maximize their combined Social Security benefit. Applying for benefits prior to full retirement age eliminates the best advantages of this strategy due to the deemed filing rule. The deemed filing rule requires an applicant who is applying for benefits before their own full retirement age to take the larger of all benefits they may be entitled to – and eliminates their ability to pick and choose which benefit they want now and which benefit they wish defer to allow to grow until later.
Assuming the couple has reached their full retirement ages, combining a “File & Suspend” application with the “Restricted Application for Spousal Benefits Only” application can provide a significant increase to a couple’s cumulative Social Security benefit over their lifetimes.
Significant Changes to the File & Suspend Rule
The File & Suspend rule was eliminated under the new rules, with a few exceptions.
- New Rules: Beginning after April 29, 2016 suspending a benefit (the “suspend” of part of a file & suspend application) will now halt all benefits being paid on a worker’s record until the time the worker chooses to begin receiving benefits. This includes all dependents filing for benefits under the worker’s record – spouses, ex-spouses, and benefits paid to the worker’s children. Prior to the new law, current rules allowed dependents to continue benefits under a worker’s record, even if the worker suspended his or her own benefit to collect valuable DRCs past full retirement age.
- Exception: For those who already have begun a file & suspend strategy by April 29, 2016, nothing changes due to grandfather provisions in the new law.
- Exception: The new rules allow a 6-month grace period that began November 2, 2015 for couples to act. Clients who are at least full retirement age by April 29, 2016 remain eligible to file & suspend, but must make a file & suspend application with SSA during this 6-month grace period, which ends of April 29, 2016. By doing so, the client leaves the door open allowing the spouse, if eligible, and qualifying children to receive benefits off the client’s record under the old rules – even after the new law becomes effective.
Significant Changes to Deemed Filing & Restricted Spousal Application Rules
- New Rule: The new law amended the deemed filing rule. Unless the age exception applies, a spouse filing for a spousal benefit after April 29, 2016 will be deemed to be filing for all benefits without limitation. The option of choosing which benefit, including a restricted application for spousal (and ex-spouse) benefits only while their own benefit continues to grow, will no longer be available under the new rules.
- Exception: Clients age 62 or older on or before December 31, 2015 are grandfathered in under the old restricted application and deemed filing rules, and are not subject to the new expanded deemed filing rules. Through this age exception only, the restriction application for spousal benefits continues to apply.
Michele A. Griepentrog, CFA, CFP, CSSCS is a Vice President & Senior Wealth Advisor at Alpine Trust & Investment Group. She has more than 27 years of investment management experience.