New Budget Deal to cut Social Security Benefits

New Budget Deal to cut Social Security Benefits

What to know about the new Budget Deal that is cutting Social Security Benefits.

For the average 65 year old retiree almost 40% of their retirement income comes from Social Security Benefits (1). On November 2, 2015, President Obama signed the Bipartisan Budget Act of 2015. Included in the Act were significant changes made to two of the most beneficial Social Security claiming strategies for married couples and surviving spouses. Putting politics aside, while the intentions of those that added these changes to the Act may have been to improve the reduction of Social Security deficits for future claimants, it will certainly affect valuable claiming options for many retirees.  The good news is that for those nearing age 62 or age 66 there are certain grandfathering provisions.  Because of these changes it is extremely important that you understand the state of your Social Security benefits because immediate action may be required.

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The first major change – Rules on Deemed Filing Extension

Once a married person reaches age 62, he or she may be entitled to both a spousal benefit and a worker’s benefit.  Before the rule changes brought on by the Act, an individual entitled to both benefits who filed a claim between ages 62 and full retirement age would be “deemed” to have filed for the larger of the two benefits. This is called the “deemed filing” rule. An individual waiting to file until full retirement age had the option to elect the spousal benefit and then switch to the worker’s benefit by age 70. This allowed one to receive the spousal benefit while deferring the worker’s benefit, which could continue to grow with deferral credits.  The Act eliminates this opportunity to switch benefits by extending the concept of “deemed filing,” all the way to age 70. Now, anyone filing for benefits will receive the larger of either the worker’s or spousal benefit. It’s important to note that if you reach age 62 before the end of 2015, you are grandfathered in and may take advantage of the current rule.

The second major change – Limits on the “File and Suspend” Strategy

 After May 1, 2016, claimants will no longer be able to “file and suspend” benefits for the purposes of either 1) protecting the right to file for retroactive benefits; or 2) triggering a spousal benefit for a spouse. There will be a grace period of 180 days to provide an opportunity for claimants that are already age 66 or those that have reached the age of 66 before May 1 to voluntarily “file-and-suspend” in order to be grandfathered into the old rules.

Before the Act an ancillary benefit of “file and suspend” strategy was the establishment of a claiming date. This creates a plan B for those who decide to defer benefits in case of a change in their health status. As an example, a healthy single (or married) worker, intending to defer benefits until age 70, could file and suspend at age 66, but if an illness that reduced life expectancy were to strike at age 68, you could file for benefits and retroactively request benefits due from age 66.  Social Security would provide a lump sum benefit for the two years of benefits between 66 and 68 while future benefits would be calculated based on an age 66 filing date. Without the “claim and suspend” strategy, the rules allow only up to 6 months for one to receive retroactive benefits. This is a great strategy for single and married workers who 1) have not yet claimed benefits and 2) have reached or will reach the age 66 before May 1, 2016.

What has not changed:

While the Act does make major changes to the strategies that benefits married couples and surviving spouses the most, the basic benefits and calculations of worker, spousal, and survivor benefits remain unchanged.  There is also no change in the factors used to calculate benefits that are claimed early or are deferred. However, under the new legislation claimants may no longer file for a spousal benefit before the worker begins to receive benefits nor may a married or divorced individual claim a spousal benefit and later convert it to a worker’s benefit.

What should I do now?

If you will be 66 years or older prior to May 1, 2016, and you have not started your Social Security benefits, you should consider “filing and suspending” your worker’s benefits.  If you are married, “filing” triggers your spouse’s right to begin spousal benefits.  “Suspending” benefits signifies that you will not immediately receive your worker’s benefit and the benefit will be deferred until you choose to claim it.  This will allow you to take advantage of the “delayed retirement credits”, which increase your Social Security retirement benefits by 8 % per year after full retirement age up until the age of 70.  This must be done before May 1, 2016 because after this date, a married worker will have to file and begin to receive benefits in order to trigger the spousal benefit.

Before November 2nd there were 7 different filing strategies, 567 different ways, and 2820 rules to consider when collecting Social Security benefits (2). Choosing which strategy is best for you and when to execute it can be a very daunting task. The Social Security Administration is not authorized to give you advice, merely to help a claimant file for benefits. With the new rule changes and the deadline for some to make elections prior to May 1, 2016 that will allow them to maximize their benefits, the time to align yourself with a qualified financial professional that has expertise in claiming benefits could not be greater. Do not go it alone and do not delay, as the time frame to capitalize on these benefits is quickly running out.

Jay Robinson
Partner, ARQ Wealth Advisors, LLC

 

  • Source: (1) EBRI (Employee Benefits Research Institute). Data book on Employee Benefits. Data as of December 31, 2011. Studies conducted every 9 years.
  • Source: (2) ssa.gov

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