The Rules Are Always Changing…Especially When It Comes to Social Security

On November 2, 2015, Obama signed into law the Bipartisan Budget Act of 2015. This act provides funding for the federal government through the 2017 fiscal year, $80 billion in additional federal spending, and increases the federal government’s borrowing limit until March of 2017, which is well after the elections.
Here is a tricky add-on provision from two weeks ago:  As part of the budget, several changes were made to Social Security that will go into effect very quickly. These changes will affect clients who are approaching retirement and looking to begin Social Security benefits within the next six months.  Keep in mind that normally, new legislation never gets implemented for many years into future.  However, this new law will affect Social Security benefits right away, atarting May 2, 2016.  This is the fastest any new legislation has been put into effect in the last 40 years. This will affect anyone who is age 62 to age 66. If that means you,  please read on.
NEW LAW CHANGE #1:  The biggest change in Social Security was the elimination of the “file and suspend” and “file and restrict” strategies, effective May 1, 2016. These changes were made to help the solvency of the Social Security Trust Fund. Under current law, if clients have reached their full retirement age, they can “file and suspend” their Social Security benefits. “File and suspend” typically allows a lower-earning spouse to receive a higher benefit based on their spouse’s work history. Those who suspend their benefits are still able to take advantage of delayed retirement credits (in which benefits increase 8 percent a year until age 70) because they are not receiving their benefits.  This will end May 1, 2016.  The motivation for this is the low interest rate environment stretched over several years.
Many people ask why would a person would want to file and suspend, isn’t it better to take the monthly benefit?  One option to consider is if you have savings that are only earning one-fourth of 1 percent.  Why not use the savings and allow the Social Security benefit to increase by 8 percent each year.  One concern relates to health:  If a person were to suspend receiving benefits from age 66 to 70, while their account is capturing the 8 percent increase each year, if they pass away, then they forfeit all future benefits.
EXAMPLE:  Let’s calculate how many years a person would have to live just to recapture the 48 payments they would miss by suspending.  Suppose the benefit is $2,000 a month at full retirement age.  They file and suspend so they don’t receive this $96,000 ($2,000 x 4 years x 12 months a year).  Allowing the 8 percent of $2,000 to increase for 4 years, the new monthly benefit will increase to  $2,520 a month.  Dividing the $96,000 the client would already have received by the increase a month of $520 = 208 months, or a little over 17 years.  In order to break even on money they would have already received, they will have to live to age 87.  This does not count the opportunity of what could be done with the $2,000 a month to pay down credit card debt, for example, at a whopping 19 percent interest rate.
MY SUGGESTION: Take your money at age 66.  At least you will receive some money.  If the government can’t pay in later years, you might as well get it now.  I personally don’t want to wait until age 87 just to get the money I could have had when I was age 66.

NEW LAW CHANGE #2:  “File and restrict” allows clients at the full retirement age to restrict their application to spousal benefits only. This strategy is typically applied when one worker claims benefits and the other spouse then claims only a spousal benefit to increase their total payment from Social Security. Workers claiming spousal benefits can then claim their own higher benefit down the road. When they restrict the application to spousal benefits, they are not claiming their own benefit so it continues to grow. If you do “File and Restrict,” and then decide against that option after one or two years, you can stop deferring benefits and receive all the past in form of a lump-sum.
TIMING:  Some of the details and rules of administration for these new restrictions on claiming strategies have not come out yet.  Clients who are age 66, or turning age 66 on or before May 1, 2016, will still be able to “file and suspend.” After May 1st this next year, the “file and suspend” and “file and restrict” strategies will be eliminated. If clients have already used one of these strategies, their benefits will not be affected.
Money Mastery Principles to Consider with Any Change in Laws Affecting Your Money
Principle 5: Know the Rules and Principle 6: The Rules Are Always Changing. Learn these Principles, live them, and then when changes to the way Social Security and any other host of financial issues occur, you will be prepared to make changes quickly in order to adapt the most smoothly.