You’ve probably heard the federal government has made changes that may affect the way you can take your Social Security retirement benefits. While there’s still potential for some “tweaking” of the language around these changes, I’d like to share some insight on what we know now and what it may mean for you.
WHAT is Changing with Social Security?
The two strategies affected by the new law (that law being the 2015 budget) are known as File and Suspend and Restricted Application.
File and Suspend allowed you (generally the higher earner in a couple) to file for, but suspend taking, your Social Security retirement benefits while permitting your spouse and/or eligible dependents to collect benefits based on your earnings record. In that way, you earned the 8 percent annual “raise” on your individual benefits, your spouse/dependents received their paychecks based on your earnings record, and the family collectively was able to maximize its Social Security income.
Under the maximization strategy known as Restricted Application, you could file for Social Security benefits at or after full retirement age (FRA), but elect to take only your eligible spousal benefits, allowing your individual benefits to grow until they max out at age 70. At that point, with a raise of up to 32 percent under your belt, you would switch to taking your individual benefits.
WHEN Are the Changes Effective?
Restricted Application is being phased out immediately for anyone born after 1953. You will still have the option to File and Suspend your benefits, but timing is important here, because after April 2016, there are consequences for requesting a suspension of your benefits.
First, the change means that if you request your suspension after April of next year, no one else can collect benefits on your earnings record. (As currently written, this includes ex-spouses. That is one nuance Congress may have to address so that a maximization strategy for married couples does not become a punitive strategy for use by ex-spouses.) Second, if your suspension is requested after April, you can no longer request retroactive payments of those suspended benefits, and that really makes File and Suspend unattractive vs. doing nothing at all.
Here’s why: Before, you could suspend your benefits and then request up to four years of retroactive payments (based on the length of your suspension, of course). Going forward, there will be no retroactive payments under File and Suspend. You may well be better off not filing for your benefits; at least then you have the option to request six months of retroactive payments should you have that need.
Essentially, File and Suspend goes from a “why wouldn’t I?” family maximization strategy to “why would I?” Under the new rules, there generally is no reason or incentive to file and immediately suspend benefits. Come May, the only practical use for suspending benefits would be if you started collecting early (maybe you needed the paychecks) and later wanted to halt those checks to begin earning your delayed retirement credits.
WHO Is Affected?
Restricted Application will be off the menu for anyone born after 1953. You will have to claim your individual benefit prior to collecting a spousal benefit, regardless of age. For those born in 1953 or earlier, Restricted Application remains an available option.
File and Suspend is more complicated. The short answer is that File and Suspend as we know it now will be void for new filers after April 2016. However, anyone who turns 66 by April 30 (perhaps even Aug. 31; we’ll know once the law is interpreted) and requests a suspension prior to April 30, 2016, will likely be grandfathered. The same is true for anyone currently using the strategy—the government is not expected to take away benefits already being received via this strategy.
HOW Should You Adjust?
If you’re among those with a 66th birthday in or before August (or already FRA and not yet collecting benefits), talk to your advisor about whether File and Suspend is an appropriate strategy for you. Do this prior to April, as your window of opportunity to lock in this strategy before it expires is small. Understand, of course, that if your 66th birthday is between May 1 and Aug. 31, that window is questionable. Your ability to use the strategy will depend on how Congress amends the law throughout the appropriations process and how the Social Security Administration (SSA) interprets the law in writing the procedures. (By way of background, the SSA now allows you to file a request four months before it can take effect; thus the potential August birthdate cut off. Keep in mind, August would be the cutoff for your 66th birthday, but you would still need to make the request by April 30, 2016.)
Ultimately, if you and your advisor determine File and Suspend would be a useful strategy for your circumstances, you may want to request it by April 30 even if you have a 66th birthday that falls in the questionable zone of May through August, as you do have a year to turn back the decision by submitting a request for withdrawal of application.
As for Restricted Application, if you’re born prior to 1954, there’s an opportunity to take advantage. I strongly suggest you talk with your financial advisor if you’re thinking about using one or both of these strategies.
For most of the rest of us, now may be a good time to reassess our retirement income strategy overall. Ultimately, Social Security is just one element of a successful retirement income plan, and it shouldn’t be the lynchpin. After all, annual Social Security payments averaged $16,000 for individuals and $25,000 for dual earners in 2014.
A financial advisor, armed with the most innovative tools in retirement income planning, can help you identify your income goal in retirement and assess where you stand today. From there, you can develop a plan to close any gap. And be sure to visit BlackRock’s Retirement Center for a wealth of information on retirement planning, including dedicated resources related to Social Security collection strategies.
WHY (Oh Why)?
Now that we’ve covered the what, when, who and how, you may be wondering why these changes are being implemented. It’s no secret the Social Security system is underfunded and in need of a lifeline. The 2015 Social Security Trustee Report estimates the combined Retirement and Disability Trust funds will be exhausted in 2034. At that point, if no changes are made, the report estimates the system will have enough incoming revenue to cover only 79 cents of every dollar owed.
The presumption is that these changes now on the table will increase the sustainability of the system. One estimate was that if every eligible person were taking advantage of these two collection options, it would cost the Social Security system roughly $9.5 billion a year. (As a point of reference, Social Security paid out approximately $725 billion in retirement-related benefits in 2014.)
That said, it is unclear how many people are actually using one or both of these options. In fact, I’ve been talking to people about Social Security for seven years now and a great many have been unaware that these strategies existed; the Social Security Administration doesn’t necessarily advertise them. So, in reality, the potential savings are yet to be determined, though the SSA Chief Actuary has offered a long term estimate.It is clear, however, that these changes alone won’t come close to addressing the magnitude of the problem. Congress still has a lot of work to do over the next 18 years.
Rob Kron, Managing Director, is the head of Investment and Retirement Education for BlackRock’s U.S. Wealth Advisory group. He provides practical information on topics that are important to every saver and investor of every age.