By Francis C. Thomas, CPA PFS
The Bipartisan Budget Act of 2015 (BBA) has introduced substantial changes to Social Security law. The BBA passed the federal legislative branch on Halloween weekend 2015 without public input or debate. It became effective when the act was signed by the President on November 2nd. The Social Security aspects of this act were a great surprise to the general public and planning profession. Specifically, the new law has limited Social Security claiming strategies that would have resulted in more retirement income for you. The legislation has affected millions of Americans who were planning to use “file and suspend” and “restricted application”. These two provisions were created by the Senior Citizens Freedom to Work Act of 2000 to encourage seniors to continue working, provide a more satisfying retirement, and extend retirement portfolios of middle-income Americans. The new rules impact married, single, and divorced individuals.
The glossary at the end of this post provides definitions and explanations of many of the key terms.
If you are already receiving Social Security, breathe easy. Anyone currently receiving Social Security benefits will not be affected by the new rules. Individuals who already implemented file and suspend and filed a restricted application are grandfathered and allowed to continue with their claiming strategy.
The (BBA) dramatically changed Social Security claiming options and effectively placed each of us into one of three groups:
- People born on or before May 1, 1950 will be least affected. Workers in this group can suspend their retirement benefits and still allow spouses and dependents to collect auxiliary benefits (i.e. spousal and child benefits) based upon the worker’s record during the suspension. The primary reason to suspend retirement benefits is to permit worker benefits to grow by delayed retirement benefits of 8% per year accrued until age 70. This suspension results in a higher amount when benefits commence at age 70 or earlier. Another significant advantage of the voluntary suspension of worker benefits is that it increases the amount a survivor would collect upon the death of a worker. A person born on or before May 1, 1950 must request and suspend his/her worker benefits by Friday, April 29, 2016 to allow a spouse or other dependent to collect auxiliary benefits based upon the worker’s record while the worker’s retirement benefit is suspended.
- People born between May 2, 1950 and January 1, 1954 will see mixed effects of the new rules on their optimal claiming strategies. Workers in this group will no longer be able to file and suspend their benefits as they did prior to the passage of the BBA. Workers in this cohort must file and collect in order for a spouse, child, or dependent parent to collect auxiliary benefits on the worker’s record. This means that for a spouse to collect on a working spouse’s record, the worker must pass up the delayed retirement credits and enhanced survivor benefits. However, the spouse of a worker in this group can file a restricted application which entitles the spouse to collect spousal benefits rather than collecting his/her own worker benefits. The ability to use the restricted application permits the spouse’s benefit to grow from the delayed retirement credits. The ability to file a restricted application may be advantageous for spouses with moderate or high incomes.
- People born on or after January 2, 1954 will be the most affected. Individuals in this group are not able to use file and suspend or restricted application provisions. Also, those individuals born after January 1, 1954 will be subject to deeming through age 70. This includes married as well as divorced individuals. Deeming requires a worker who, at the time of filing for benefits, is eligible to collect a worker benefit as well as spousal benefit or a divorced spouse’s benefit to take the larger of the two eligible benefits.
Issues for Groups Two and Three
Another implication of the new rules is that individuals in groups two and three who suspend their benefits can no longer receive retirement benefits in a lump sum. This is known as retroactive/bulk payment provision. It still remains possible to voluntarily suspend benefits or temporarily stop benefits to earn delayed retirement credits. However, all auxiliary benefits paid on the worker’s record will cease. No one can collect a spousal or child benefit based upon the covered earnings record of a worker in groups two or three who suspends retirement benefits. Suspending worker benefits and the interruption of auxiliary benefits for dependents is a key aspect of the new law. No one who requests to suspend his/ her retirement benefit can collect excess spousal or excess widow(er) benefits while the retirement benefit is suspended.
An essential message to individuals who are already eligible or will be eligible before May 1, 2016 to file and suspend is that there is limited time during which they can choose to suspend worker benefits without affecting a spouse’s, ex-spouse’s, or child’s eligibility for auxiliary benefits. They must suspend on or before Friday, April 29, 2016. This also preserves their ability to request a retroactive/ bulk payment if they change their minds before reaching age 70. After April 29, 2016, these opportunities will disappear.
The law grandfathered those currently using file and suspend and restricted application, provided a six month window for workers to elect to use file and suspend, and established a phase-out period for individuals to use the restricted application. Workers still can earn delayed retirement credits of 8% per year and they can qualify for maximum worker benefits at age 70. For both married and divorced individuals who will reach age 62 beginning in 2016 and later, the option to file a restricted application for spousal benefits only will not exist. Benefits for widow(er)s are basically unchanged.
These changes will make planning for Social Security benefits more difficult. The rules for Social Security are complex and complicated. Social Security is an important component of most people’s retirement planning. Mistakes made in claiming Social Security can be permanent and costly. If you have any questions we at Capaldi, Reynolds, and Pelosi, P.A. are available to assist you.
Child benefits – A child can claim child benefits on a parent’s record if the child is dependent as defined by the Social Security Administration and the child is not married. The child also must be either under age 18, or no older than 19 and a full-time elementary or secondary school student. The child’s benefit is equal to 50% of the parent’s primary insurance amount. There is also a disabled child benefit for children 18 and over and under disability as defined by the Social Security Administration. The disability must also have begun before the child reached age 22.
Deeming – Forces an individual to collect the amount equal to or close to the greater of two benefits for which he/she is eligible. This means that a spouse cannot restrict an application to collect the lesser spousal benefit so that his/her own worker benefits will grow by delayed retirement credits.
Delayed retirement credits – Between full retirement age and age 70, monthly benefits will increase by 8% per year plus the COLA for people who defer their worker retirement benefits.
Divorced spousal benefits – A benefit paid to divorced spouse based upon the earnings record of an ex-spouse. The divorced spouse must be single, at least age 62, and married to the ex-spouse for at least ten years. The ex-spouse needs to be entitled to retirement or disability benefits. If collected at full retirement age, the amount is equal to up to 50% of the ex-spouse’s full retirement benefits.
File and suspend – A worker is first eligible to file and suspend at full retirement age. Filing makes the worker’s earnings record eligible for auxiliary benefits such as spousal benefits. Voluntarily suspending the worker’s benefits permits the worker’s benefits to grow by the delayed retirement credits.
Full retirement age (FRA) – is the age at which a person may first become entitled to full or unreduced retirement benefits. For those born between 1943 and 1954 the FRA is 66.
Primary insurance amount – is a worker’s full retirement benefit. It is calculated using a progressive formula based upon the worker’s average indexed monthly earnings.
Restricted application – At full retirement age, an individual is permitted to choose to collect spousal benefits and let his/her worker benefits accrue delayed retirement credits.
Retroactive/bulk payment – If a worker files and suspends at full retirement age, the suspended benefits are basically banked. At any time from full retirement age to age 70, the worker can claim the accumulated benefits as a lump sum if willing to forfeit the 8% delayed retirement credits. This provision enhances the worker’s flexibility should new facts and circumstances make a different strategy preferable.
Spousal benefits – A benefit paid to married spouses. The amount is equal to up to 50% of the worker’s full retirement benefits when collected at the spouse’s full retirement age. In order to collect spousal benefits, the working spouse must have filed for retirement or disability benefits.
Survivor benefits – A benefit paid to the surviving spouses, children and elderly dependent parents based upon the earnings record of a worker who dies.
Worker benefits – The benefit paid to an individual based upon his/her earnings record. Normal benefits are paid at full retirement age. Reduced benefits can be paid as early as age 62. Maximum benefits are paid at age 70.
Note: The rules for Social Security are complicated. Further information and explanations of these terms can be found at the Social Security website, SSA.gov.