This past week, all eyes were on Congress and the debt ceiling negotiations. A budget deal was struck, but there were a couple important provisions of that bill not being talked about which impact many of our clients and their Social Security claiming options.
Earlier this year, President Obama included language in his 2015 proposed budget to eliminate “aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.” Specifically, there were two key strategies targeted and those are now being phased out:
FILE AND SUSPEND
File and Suspend is a strategy typically used by a higher earning spouse to allow the lower earning spouse to claim benefits on his or her record.
Example: Jack and Jill are both 66, which is the current full retirement age for Social Security. Jack can file for his age 66 benefit of $2,500 per month, but suspend it (i.e. not receive it) so Jill can now receive $1,250 per month (half his benefit) on his record. Meanwhile, Jack delays his benefit to age 70 in order to take advantage of the 8% per year delayed retirement credits. At 70, he would receive $3,300 per month and Jill would continue to receive $1,250 per month.
New File and Suspend applications will be banned starting April 30, 2016. Under the new law, a suspension of benefits will mean spouses and children receiving benefits on a person’s earnings record will also have their benefits suspended. The only way for new benefits to be paid on someone’s record will be for both parties to be receiving benefits. As long as File and Suspend is implemented by April 29, 2016, benefits will continue to be paid as before.
So, if you or your spouse is over age 66 now, or will be by April 30, 2016, you can still implement the File and Suspend strategy for approximately the next 6 months.
CLAIM NOW, CLAIM MORE LATER
Claim Now, Claim More Later is a strategy that allows one spouse to claim benefits on another spouse’s record while delaying his/her own benefit.
Example: Mike’s benefit is $2,500 per month and Molly’s benefit is $1,000 per month. Molly signs up to receive her $1,000 per month benefit at 66. Mike restricts his application at age 66 to his spousal benefit and begins to receive $500 per month (half Molly’s benefit). He will file for his own benefit at age 70 at which time it will have increased to $3,300 per month. Therefore, Mike has Claimed Now, and Claimed More Later. Incidentally, Molly would claim her spousal benefits at age 70 as well.
Claim Now, Claim More Later will be banned for individuals under the age of 62 at the end of 2015. Individuals over the age of 62 at the end of this year will still be able to file a restricted application and use this strategy. One important note: a person needs to be full retirement age (66) in order for a restricted application to work; under age 66, when a person files for Social Security, they are deemed to be filing for all benefits for which they are eligible. So, age 62 at the end of this year is the cutoff for considering this option, but you still need to be 66 to file the restricted application and use the strategy.
Bottom line: if you are over 62 on 12/31/15, you can still Claim Now, Claim More Later in the future.
Social Security planning is very complex and we are not attempting to evaluate all the options in the above examples. The unique circumstances of a person’s own situation will dictate which strategy is best. The new budget bill may be phasing out a couple great options, but there are still other strategies we can use. We will be reviewing those options with our clients in our next meeting.
If you are not a client of The Joseph Group and would like to know how the new budget bill impacts you, please contact us and we would be happy to analyze your Social Security options.