President Barack Obama signed the Bipartisan Budget Act of 2015 into law on November 2, 2015. The budget provides relief for sequester cuts and allows for increased investments to support economic growth and build a strong middle-class for the next two years. To offset the cost of additional discretionary spending, the budget had to make cuts or changes to certain programs, including the Social Security program. The adjustments to Social Security will eliminate the file and suspend and restricted application strategies that helped some couples increase their lifetime Social Security benefits.
The new Social Security laws will take effect May 1, 2016. For those individuals currently using the file and suspend or restricted application strategies, they will not be affected by the rule changes. In addition, those individuals that turn age 66 before April 30, 2016 may elect to use the file and suspend strategy, if completed before May 1, 2016. The restricted application strategy will be available for those individuals that turned age 62 by December 31, 2015.
The file and suspend strategy allowed for one spouse, who reached their full retirement age, to file for and immediately suspend his or her benefits. By doing so, the second spouse would be allowed to start receiving a spousal benefit. The suspended benefits of the first spouse would then accrue delayed retirement credits at 8% a year. Under the new rules, if an individual decides to suspend his or her benefits, all benefits payable on his or her earnings record to other individuals will be suspended as well.
The restricted application strategy was often used in conjunction with the file and suspend strategy. By filing a restricted application, a person could apply for just a spousal benefit while his or her benefits accrued delayed retirement credits. Under the new rules, filing for a spousal benefit will trigger a person’s own retirement benefit. The Social Security Administration will pay only the greater of the spousal benefit or a person’s own benefit.
These two strategies were actually unintended loopholes that extended from the “voluntary suspension” concept introduced by the Senior Citizen Freedom to Work Act of 2000. The idea was originally intended to allow seniors that had mistakenly applied to receive their benefits early, stop their payments and earn delayed retirement credits. This allowed for these seniors to continue working, or even rejoin the workforce, without the risk of reducing or eliminating their social security benefit. The Social Security Administration will reduce a person’s annual benefit, if under the full retirement age, by $1 for every $2 made over a certain dollar threshold ($15,720 for 2016). Earned income includes W-2 wages and net earnings if self-employed. It does not include pensions, annuities, investment income, interest, or government or military retirement benefits.
It’s important to note that even if you missed out on using one of these strategies, you still may receive your maximum benefit. According to an analysis done by Social Security Choices, a software company that helps individuals optimize Social Security strategies, only about 18% of the cases analyzed showed it was beneficial to use the file and suspend and restricted application strategies. In addition, if these strategies were implemented, it could take as many as 12 years until a cumulative benefit was received.
With Social Security benefits playing a large part in calculating financial independence, DWM has researched the new adjustments to better understand how our clients will be affected. Although the new laws will limit the amount of planning available, we will continue to analyze each client’s Social Security situations in an effort to maximize their benefits, as there are still options and strategies available.
Furthermore, any quantitative analysis is complicated by the risk that there will be future changes to Social Security, which could include “means testing”. Individuals, whose retirement incomes exceed established thresholds, could have their future benefits reduced or eliminated. We anticipate that maximizing Social Security strategies will continue to be a moving target. We look forward to working with each of our clients as they approach “retirement age”.