Two popular social security claiming options used by married couples when planning for retirement are changing dramatically after April 29, 2016 due to the Bipartisan Budget Act of 2015. These strategies allowed spouses (and, under certain circumstances, other family members and ex-spouses) to receive payments in the form of a dependent benefit while still capturing delayed credits for their own social security benefits.
The Restricted Application. The first change concerns the Restricted Application for spousal benefits. Prior to the new law, an individual who was eligible for both a spousal benefit based on the work record of their spouse and a retirement benefit based on their own work, could choose to elect only a spousal benefit at Full Retirement Age. This allowed his or her own benefit to accumulate 8%-per-year Delayed Retirement Credits and then switch to his or her own larger benefit at any point in the future – up to and including age 70.
The new law phases out this option. For people born January 1, 1954, or earlier, the option to file a Restricted Application for only spousal benefits will remain available. But for people born January 2, 1954 or later, an application for retirement benefits or for spousal benefits will automatically trigger entitlement to the other benefit. What this means is they will, in effect, be filing for both their retirement benefit and spousal benefits. They will receive the larger of the two benefits. This eliminates the ability to hold off receipt of their retirement benefit, thereby losing the ability to have their retirement benefit continue to grow at 8%-per-year. Further, if a participant is not eligible for spousal benefits (because his or her spouse had not yet elected) but later becomes eligible for a spousal benefit, entitlement is automatic and occurs on the first day of eligibility.
Voluntary Suspension. The second change concerns voluntary suspensions. Under the previous law, a lower-earning spouse is eligible for spousal benefits only after the primary wage earner under whose record she or he is filing has filed for benefits. Spousal benefits do not earn Delayed Retirement Credits, so delaying a spouse’s benefit past Full Retirement Age represents lost checks, with no compensatory increase in the benefit amount.
An important planning consideration for couples has always been the understanding that the widow benefit that is available after death of the first spouse is based on the deceased’s benefit amount, including any 8% increase the deceased would have received due to delaying benefits. The combination of these two rules regularly creates tension between the claiming desires of the spouse and the primary claimant. The spouse wants to receive the highest widow benefit possible, but does not want to forfeit spousal benefits in the short term, since there is no compensatory increase in the spousal benefit for delay.
The solution under prior laws was for the higher wage earner in the couple to file for benefits, then immediately request those benefits be suspended. The checks to the higher wage earner would stop, allowing the higher wage earner’s benefit to grow by 8% per year, increasing not only the retirement benefit, but also the benefit payable to the spouse upon his death. While the benefit was in suspense, the spouse was able to collect a spouse’s benefit.
The new law causes a Voluntary Suspension to stop all benefits payable under the earnings record of the person whose benefit was suspended. In other words, the spouse will not be able to collect a spousal benefit during the time that the wage earner’s benefit is suspended.
The new law also eliminates the ability to request a retroactive lump sum for all benefits between the date of the request and the date of suspension, so the only reason to request a Voluntary Suspension under the new rules will be to accumulate Delayed Retirement Credits.
This portion of the law is phased in over a much shorter timeframe. Only people who suspended benefits in the past or within the first 180 days after enactment will fall under the old rules, and will continue to fall under the old rules until they reach age 70 or unsuspend benefits. People who request a suspension after 180 days of enactment will fall under the new rules.
Some Benefits Excluded. Notably, all of these changes concern the interaction between retirement and spousal benefits, and do not include widow benefits. So, widows will continue to have the opportunity to restrict an application to only widow or only retirement benefits and later switch to the other benefit.
With these significant changes to Social Security, it pays to understand the potential impact on your retirement plan. Feel free to contact Hyre Personal Wealth Advisors with any questions you might have regarding how best to maximize your benefits and those of your spouse under Social Security.
The information herein has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This information is not a complete summary or statement of all available data necessary for making a decision and does not constitute a recommendation. You should discuss any tax or legal matters with the appropriate professional.