November 16, 2015 — The biggest change affecting Social Security benefits in at least 15 years is about to go into effect on April 30, 2016. It is a change that could cost certain beneficiaries $50,000 over a lifetime. As with any major change to a benefit program there has been a lot of confusion over who is affected and how – this article will explain how it will affect you.
We were fortunate to have Kurt Czarnowski, a 34 year veteran employee of the Social Security Administration and leading expert on the subject, explain the changes to us in practical terms. Here is what we learned from Kurt about how various groups are affected.
File and Suspend and Restricted Benefit
The Budget Bill passed by Congress and signed by the President in early November included changes to the Social Security program. Their ostensible purpose was to close loopholes and protect the long term financial health of the system. The biggest changes to most beneficiaries are to the popular claiming strategies known as “file and suspend” and “restricted benefit”. Knowing the differences between these strategies is key:
File and Suspend. This strategy allowed beneficiaries to “file” for their SS benefits, and then immediately “suspend” them. By filing, the person’s spouse can then receive spousal benefits. By immediately suspending his own benefits, the original spouse can continue to accrue an 8% per year increase up to the year when benefits are maximized, age 70.
Restricted Benefit. This claiming strategy is slightly different from the above. In this case you don’t file for your own SS benefit at FRA. Instead, you merely claim your spousal benefit based on your eligible spouse’s earning record (your spouse has to have filed for benefits, however). By using this strategy you can continue to accrue on your own earning record up to age 70.
Benefits not repaid after April 30, 2016
One big change to the law affects EVERYONE after April 30, 2016. If you ask to have your payments suspended after that date you will no longer have the option of asking to have any and all benefit payments that have been suspended repaid to you in a lump sum. Suspended benefits will only be resumed prospectively; i.e., effective with the month after the month the request is made to SSA.
Your birthday affects claiming strategy control
The easiest way to understand how the changes affect you is to look at it by your age.
At Full Retirement Age by April 30 or currently under File and Suspend
If you are currently at Full Retirement Age (66) or over and using the File and Suspend strategy the law will NOT impact you in any way. Similarly, if you reach FRA and File and Suspend before April 30, when the law goes into effect, you are not impacted. Early versions of the law made it look like this strategy would be terminated in 90 days, but that was corrected in the final law, according to Czarnowski. To summarize: if you can take this strategy by April 30, 2106 your spouse can receive a spousal benefit while you are having your payments suspended in order to earn Delayed Retirement Credits. If you suspend benefits after April 30 anyone who receives benefits from your record will also have their benefits suspended (there is one exception; divorced spouse’s will be able to continue receiving benefits).
Born January 1, 1954 or earlier
If you were born by Jan 1, 1954 (meaning you will be at least 62 in the year the new law goes into effect), you still have one of the benefits available under the old rules. That is, you still have the right to file a “Restricted benefit application” and just claim benefits on the earnings of your eligible spouse and continue to accrue 2/3% increase per month on your own earnings record. But again, your spouse must have applied for his or her benefit to be eligible.
Born after January 1, 1954
Anyone who was born after January 1, 1954 will NOT have the option to file a restricted benefit and continue to accrue on their own earnings record. You will be subject to “deemed filing” rules even after reaching FRA. The deemed filing rules say that if you are eligible for a your own retirement benefit and a spousal benefit at the time you apply, you cannot claim one without claiming the other. You are “deemed” to be applying for both at the same time, so the SSA will decide for you which is the highest benefit and give that to you.
An opinion about these changes
We asked Kurt for his opinion about the changes to the Social Security program, which its sponsors believe is an attempt to close a loophole in the system and buttress the financial health of Social Security. Kurt is dismayed by the changes to Social Security, which he calls a social insurance program. He thinks the new changes could have “unintended consequences” for the group that has some of the biggest financial challenges in retirement – elderly single and divorced women. As he sees it, the current program helps counter the natural tendency of people to take their benefits as soon as they can. It helped encourage at least one person in the couple to delay taking their Social Security benefits, which helps get them a higher benefit, maximized at age 70. While waiting the extra few years might or might not be of benefit during the man’s (in most cases the higher earner) lifespan, the increased monthly payments could be a significant benefit for his survivor, who will then get 100% of the man’s benefit. If people take their benefit early, that could mean their widows, who generally live longer than men, will lose out on tens of thousands of dollars during their final years.
What Should You Do?
If you are still eligible for file and suspend or a restricted application, the decision to take advantage of that strategy, or not, is yours. In our interview Kurt was clear about his role in providing information to prospective Social Security beneficiaries. He is not an advisor (and neither is topretirements.com). He does want to help people understand the options and make an informed decision. Then whatever they decide is fine with him.
The most important thing that hasn’t changed
If you are not already receiving your Social Security benefits, there is one thing that the new law does not affect, no matter what your age. That is your decision as to when to start taking benefits – whether it is as soon as you are eligible at age 62, at FRA (66 for most people), or at any time up to age 70, when your benefits stop accruing. In our opinion, if you can possibly afford it you should consider delaying taking your benefits until age 70. Each month you wait is worth a 2/3% increase to the benefit that not only you will receive for the rest of your life, but also your spouse as long as he or she lives. Kurt believes taking your benefits early is not always the best decision.
Comments? Please let us know in the Comments section below how the changes to this law will affect your decisions about Social Security. We have reprinted there an excellent question from our original post about this issue from Ann, along with Kurt’s response. It also includes a great tip for how to file and suspend.
Kurt Czarnowski is currently the principal in “Czarnowski Consulting,” a retirement planning company which provides “Expert Answers to Your Social Security Questions.”
Czarnowski is the former Regional Communications Director for the Social Security Administration (SSA) in New England, a position he held from December 1991 until his retirement at the end of 2010.