As of November 2, 2015 the Bipartisan Budget Act (BBA) of 2015 has been signed into law. The BBA was created first and foremost to raise the debt limit to avoid the United States defaulting on financial obligations. However, included in the BBA is a major game changer for all Americans retiring in the next several years.
The Senior Citizens’ Freedom to Work Act of 2000, signed into law by President Bill Clinton April 7, 2000, created multiple Social Security optimization strategies. These included the ability to file for your retirement benefits on or after your Full Retirement Age so that you spouse could file for their spousal retirement benefits, then immediately suspend your benefits to take advantage of the 8% annual increase in benefits for delaying filing past your Full Retirement Age. In addition, you could restrict your filing to just your own benefit, or just your spousal. It took a little while for most people to realize the power of these two strategies when combined, but with the increasing commonality of two earner families, this created an opportunity for families to “optimize” Social Security, and with that came a small, but growing industry built around teaching retirees how to do this. Before the rules for Social Security claiming were changed on November 2, 2015 it was considered a vital part of retirement planning.
The rule changes move to simplify the system and close what are now being called “loopholes,” but were previously actively taught by the Social Security Administration as ways to increase the overall amount of income provided by Social Security. The simple version of these rules is this, once an individual files for any of their Social Security benefits, they are “deemed” to have filed for all of the Social Security benefits that they are eligible for. Suspension of their benefits will allow for Delayed Retirement Benefits to begin to accrue, however any benefits based on the wage earners benefits are also suspended, and when benefits are re-filed for there are no retroactive benefits available.
What this means for retirees is that the popular File and Suspend strategy is going away, as well as the slightly less known Restricted Filing strategy. This doesn’t mean that retirees can’t, and shouldn’t, optimize their Social Security claiming strategy, but it does simplify the options available to do so.
One important caveat here is that anyone who starts a File and Suspend strategy before April 30, 2016 will be grandfathered into the strategy, or in other words, even though the wage earner’s benefits have been suspended, anyone else currently receiving benefits based on the wage earner’s benefits will not have their benefits suspended on May 1, 2016 when this part of the law goes into effect. In order to start this strategy, the wage earner who will File and Suspend needs to be their Full Retirement Age, which for those who can take advantage of this strategy is age 66. So to start this strategy the wage earner needs to have been born on or before April 30, 1950 (the Social Security Administration deems everyone to have been born the day before their birthday). This will make spousal benefits available to the wage earner’s spouse at any time after the File and Suspend is started. In addition, those who are able to start a File and Suspend strategy before April 30, 2016, will also be able to retroactively claim suspended benefits receiving a lump-sum for benefit payments that were suspended and restart benefits at the level they were being paid at when they were suspended.
The second important caveat is that for anyone who will be 62 during 2015, or in other words was born on January 1, 1954 or earlier (since the Social Security Administration deems everyone to have been born the day before their birthday), will still be able to restrict their Social Security filing to just one available benefit. The most popular way to use this option is to restrict filing to spousal benefits only so that one’s own retirement benefit can grow at 8% annually with Delayed Retirement Credits. Note that for an individual to use this option they will need to wait until Full Retirement Age, or age 66 for those able to use the Restricted Filing option, otherwise they are deemed to have filed for all available benefits per the law prior to the BBA.
For those who are not eligible for either of the above strategies, this does limit the Social Security optimization tools available, but it does not eliminate them. Money Tree’s Silver Financial Planner Social Security claiming strategies feature is being adjusted for the new law. TOTAL Planning Suite’s Social Security claiming strategies is in development and will be tailored to the new law and deliver important information to help evaluate Social Security start age decisions.
A second article showing the impact that Social Security planning in the Post-BBA world can have on a couple’s retirement will be coming soon.
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