The Bi-partisan Budget Act of 2015, which passed through Congress at breakneck speed included groundbreaking Social Security reform measures. More specifically, the budget act eliminated the file-and-suspend and the restricted application strategies, two key strategies couples used to coordinate retirement and spousal benefits to maximize Social Security income.
The 1939 Amendments introduced spousal benefits and paved the way for nonworking spouses to receive a Social Security benefit equal to 50 percent of his or her spouse’s Full Retirement Age (FRA) benefit. One caveat, the primary worker (on whose record the spousal benefit is based) must have claimed his or her own retirement benefit in order for a spouse to claim a spousal benefit.
More recently, the Senior Citizen Freedom to Work Act of 2000 introduced the ability to voluntarily suspend a retirement benefit. The intent was to allow individuals who had claimed Social Security benefits, but later had a change of heart, to voluntarily suspend his or her benefits. The voluntary suspension, which is available once an individual reaches FRA, enables a married individual to file for his or her own benefit, then immediately request those benefits to be suspended. Hence the name for the strategy, “file-and-suspend.”
Why would the primary worker want to suspend, or delay, his or her own benefit? Because each year you delay your Social Security retirement benefit beyond your Full Retirement Age (FRA), you are credited with an 8% delayed retirement credit (DRC). For those with a FRA of 66, that’s a potential increase of 32 percent when retirement benefits are delayed until age 70, the cutoff for DRCs. The beauty of the file-and-suspend strategy is the spouse gets to collect the spousal benefit and the primary worker still gets to collect the annual DRCs.
The new rule doesn’t eliminate the voluntarily suspension; it does, however, prevent spousal benefits from being paid on a suspended retirement benefit. The new rule becomes effective 180 days after the passage of the budget act.
Furthermore, under the old rules, an individual was permitted to effectively renege on a voluntary suspension. In doing so, he or she would receive 1.) a lump sum benefit equal to the amount that would have otherwise been received had he or she not suspended benefits; and 2.) going forward, a monthly retirement benefit equal to what he or she would have been receiving at that time if benefits had not been suspended. The new rules eliminate the lump sum benefit, and the retirement benefit going forward will be based on the date the benefits were resumed (rather than date benefits were suspended), including any DRCs.
An interesting feature of a spousal benefit is it’s actually available to both spouses, even to those who qualify for his or her own retirement benefit. And this is where planning under the old rules gets fun. Using the so-called Restricted Application, an individual, who is entitled to both a spousal benefit and a retirement benefit, may elect to claim only the spousal benefit. In doing so, an individual could receive as much as $60,000 in spousal benefits while still delaying his or her own benefit in order to collect the annual 8 percent DRCs.
Under the old rules, the restricted application for spousal benefits was only available once an individual reached FRA. Prior to FRA, the deemed filing rules apply, which require an individual to file for all available benefits – including the spousal benefit and his or her own retirement benefit – and will be paid whichever is higher.
The budget act effectively kills off the restricted application strategy by extending the deemed filing rules beyond FRA. The new rule will apply to anyone turning 62 in 2016 or later, which means anyone reaching FRA between now and 2020 will still be able to file a restricted application.
The new rules also apply to divorced individuals trying to claim a divorced spousal benefit. Fortunately, the rules won’t affect survivor benefits, so widows will still be able to restrict an application to claim only a widow benefit or only a retirement benefit, and then switch to the other later on.
The new rules are a definite game changer. Anyone who planned on coordinating spousal benefits must reevaluate their plan to see how the new rules affect them.