Latest Update on Forthcoming Social Security Changes
By Jeffrey Levine, Director of Retirement Education
In recent weeks, the Social Security Administration has released a flurry of information, including several “Emergency Messages,” aimed at clarifying some of the changes to the Social Security rules made by the Bipartisan Budget Act of 2015. The guidance addressed a number of critical, previously unanswered questions, and is poised to impact many of those in or approaching retirement. Here is a list of the key updates, followed by a more comprehensive explanation of the guidance.
- April 29, 2016 is the last day that a client can voluntarily suspend their own Social Security benefit under the “old” file-and-suspend rules.
- You must be full retirement age (currently 66) or older by April 29, 2016 to be grandfathered into the “old” file-and-suspend rules.
- Lump-sum retroactive benefits will be eliminated for suspension requests submitted after April 29, 2016.
- Although a post-April 29, 2016 suspension will stop most auxiliary benefits, divorced-spousal benefits will continue to be paid.
- As long as valid suspension requests are submitted by April 29, 2016 and effective for no later than that date, you will be grandfathered into the “old” file-and-suspend rules, even if the Social Security Administration finishes processing them at a later date.
- If you were age 62 or older by January 1, 2016, you are grandfathered in to the “old” restricted application rules, but you cannot actually submit such an application until you are 66.
- You will be exempt from the new deeming rules if you are a spouse claiming spousal benefits because you are caring for a child under age 16, or if you are claiming disability benefits.
Social Security Administration Emergency Message 16007 (EM-16007)
On February 18, 2016, the Social Security Administration issued Emergency Message 16007 (EM-16007), which addresses the changes to the file-and-suspend strategy made by the Bipartisan Budget Act of 2015. The guidance makes clear the answers to several open questions. Here’s what you need to know:
- April 29, 2016 is the last date on which you may voluntarily suspend your application while still allowing a spouse (and certain other eligible persons) to collect auxiliary benefits, such as a spousal benefit, calculated based on your earnings record. Suspension requests submitted after this date will still be accepted but, upon suspending your own retirement benefit, auxiliary benefits calculated on your earnings record will also cease. Once you resume your benefits, the auxiliary benefits tied to your record will resume as well.
Example : Phil and Nancy are married and are each age 62. Phil was a high earner, but Nancy did not work enough to be entitled to a benefit on her own record. Phil files for his own benefit and Nancy files for a spousal benefit, based on Phil’s earnings record. Eventually, Phil realizes that he made a mistake claiming his benefits so early, so he decides that when he reaches age 66 (his full retirement age), he will suspend his benefit to begin earning delayed credits, with the plan to resume them again at age 70. If he follows through with this plan, Nancy’s spousal benefit will also stop when Phil turns 66 and suspends his benefit. Since his suspension request will be made after April 29, 2016, the suspension request will effectively suspend her benefit as well. Nancy’s spousal benefit will resume when Phil resumes his benefit when he turns age 70.
- You must actually be age 66 or older by April 29, 2016 in order to be grandfathered into the “old” rules.
- The lump-sum retroactive benefit will be eliminated for post-April 29, 2016 suspension requests. Under the “old” rules, you could suspend your benefit at any time once you reached full retirement age. However, if you later chose to do so, you could request a reinstatement of your benefits retroactive to any time during your suspension. This reinstatement amounted to an “undo” of sorts, providing a lump-sum payment of benefits that would have been received from the date of reinstatement through the present. Despite suggestions from a number of experts to the contrary, EM-16007 emphatically closes the door on this strategy.
- Delays by the Social Security Administration in processing a pre-April 30, 2016 suspension request will not impact your eligibility to use the “old” rules. As long as the suspension request is submitted by the April 29, 2016 deadline, and is effective for that date or sooner, the “old” rules will apply.
- An exception to the rule is provided for divorced-spousal benefits. Thus, if your ex-spouse decides to suspend their benefits while you are receiving divorced-spousal benefits, your benefits will NOT stop.
Example : Brad, 66, and Angelina, 66, were married for 20 years before divorcing. Brad was a high earner for many years, while Angelina was a stay at home mom and had only minimal earnings. Since the marriage lasted longer than 10 years, Angelina is entitled to divorced-spousal benefits based on Brad’s earnings record.
Suppose Angelina filed for that divorced-spousal benefit at age 62. Further suppose that Brad had filed for his own benefit at age 62 but, in June 2016, after realizing it was a mistake to claim benefits so early, he decides to suspend his benefits. Angelina’s benefits will NOT be suspended. Note however, that if Brad and Angelina were still married, her benefits would have been suspended. Not fair you say? Perhaps, but that’s the way it is!
Social Security Administration Emergency Message 16004 (EM-16004)
On February 5, 2016, the Social Security Administration released Emergency Message 16004 (EM-16004) to clarify certain aspects of the Bipartisan Budget Act of 2015’s elimination of the restricted application strategy. The guidance confirms that the restricted application strategy has now been eliminated if you were not age 62 or older as of January 1, 2016. Thus, if you were born on or after January 2, 1954, you are unable to use the tactic.
- The restricted application strategy – which is still a viable approach for many boomers (those age 62 and over by the first of this year) – allows you to, upon reaching full retirement age, apply only for certain benefits to which you’re entitled. For instance, upon reaching full retirement age (currently age 66), you can file a restricted application to collect only spousal benefits, based on your spouse’s earnings record, while allowing your own benefit to grow via Social Security’s delayed credits. Those delayed credits increase your own Social Security benefit by 2/3% per month for each month you postpone receiving benefits between your full retirement age and age 70 (8% per year). In contrast, if you’re filing for Social Security benefits prior to your full retirement age, you are deemed to be applying for your own benefit, as well as your spousal or divorced benefit (collectively referred to as “AUXSPO” benefits), even if you only actually submit an application for one of them. Under the new rules, this “deeming” will apply not only before full retirement age, but beyond it as well.
- There are two key exceptions to the new deeming rules. They are:
- If you are a spouse claiming spousal benefits because you are caring for a child under age 16, you will not be treated as filing for your own benefit.
- If you are claiming disability benefits, you will not be treated as filing for spousal benefits.
You must be age 62 or older by January 1, 2016 to be grandfathered into the “old” rules, but you still need to be age 66 before you can file a restricted application! This is, without a doubt, the biggest area of confusion regarding the elimination of the restricted application strategy. The Bipartisan Budget Act of 2015 grandfathered anyone age 62 or older as of January 1, 2016 into the “old” rules – meaning that if you meet that requirement you will still be able to file a restricted application – but it’s important to remember that actually filing a restricted application is not possible until you turn 66! Thus, although you are grandfathered in to the “old” rules, you may have to wait several years (until you reach 66) before executing a restricted application.
Example: Jack and Jill are married and each has a substantial earnings record. Jack is 68 and Jill is 63. Neither has filed for their Social Security benefit yet, but both are old enough to be grandfathered in to the restricted application rules. In 2018, Jack turns 70 and files for his own Social Security benefit. At the time, Jill is still only 65, so she is not yet old enough (66) to file a restricted application. The following year, in 2019, Jill turns 66. At that time, she may file a restricted application and claim only a spousal benefit, allowing her own benefit to continue to grow via delayed credits until as late as age 70. At that time – or sooner if she desires, she may switch over to her own, higher, benefit.
With the issuance of EM-16004 and EM-16007, most of the questions about the Bipartisan Budget Act of 2015’s changes to Social Security have been answered. Now it’s up to you to make sure that you and your advisors are up to speed on these issues so that you can chart the course of action that will produce the biggest benefit for you and your family.