Jeff Cutter and I often talk to people about the funding problems that this nation faces. The mainstream media likes to talk about the national debt approaching $20 trillion but the number that hits home to those of us who are currently, or will be, relying on a fixed income in our golden years is the number attributed to Unfunded Liabilities.
According to usdebtclock.org, this number is approximately $100 trillion, which totals the difference between the net present value of expected future government spending and the net present value of projected future tax revenue, particularly those associated with Social Security and Medicare. When we discuss such topics, we often ask people whether they think Social Security benefits will go down in the future. Well, now we know the answer to that question.
Last week, President Barack H. Obama signed into law the Bipartisan Budget Act of 2015, which includes a provision that could cost many couples tens of thousands of dollars. Why? Because President Obama and Congress have agreed to a plan that will end the popular “File and Suspend” and “Restricted Application” claiming strategies for couples looking to stretch their Social Security benefits.
First, let me explain the File and Suspend claiming strategy. Under the current rules, once you reach full retirement age, you can file for benefits and immediately suspend them. Suspending your benefits allows you to earn delayed credits. At the same time, since you have filed, your spouse can file for benefits based on your earnings record, “spousal benefits.” By collecting on your earnings record, instead of your spouse’s own record, he or she can also earn delayed retirement credits. Effectively, the File and Suspend strategy allows both spouses to earn delayed credits while also providing access to spousal benefits for one of them.
Some view the File and Suspend strategy as double-dipping because people are able to access spousal benefits, while also reaping the rewards of waiting until age 70 to collect on their own earnings record. This strategy has been available to retirees since 2000, when the Senior Citizens’ Freedom to Work Act was put in place to encourage exactly what the name implies, senior citizens choosing to work until an older age. But with the new law, the File and Suspend strategy will no longer be available after May 1, 2016.
It’s been estimated that some couples could lose out on up to $50,000 of benefits when they lose the ability to File and Suspend. Furthermore, this change may affect the children of beneficiaries who would otherwise receive Social Security benefits based on a parent’s record if that parent has suspended his or her own benefit.
The second Social Security claiming strategy that will be eliminated with this new legislation involves the filing of Restricted Applications. Generally, if you have filed for benefits and your spouse is at least 62 years old, your spouse can file for a benefit based on your earnings record. If your spouse is filing for benefits and is not yet full retirement age, he or she will receive either a spousal benefit, or a benefit based on his or her own record, whichever is the higher of the two.
On the other hand, under the current rules, if your spouse has reached full retirement age, then he or she can file a Restricted Application for spousal benefits only. That way, your spouse can earn delayed credits on his or her own record, while collecting 50 percent of your benefit.
Under the new law, however, if a person files for spousal benefits, then he or she is “deemed” to have filed for his or her own benefit as well and will be forced to collect whichever is the higher of the two. A person will no longer be able to file a Restricted Application for just spousal benefits, even if he or she has reached full retirement age.
Those who will be 62 by the end of 2015, will still be permitted to file a Restricted Application at full retirement age or later. For the rest of us, that strategy will no longer be available.
Jeff and I always explain to people that, among other things, a sound retirement plan incorporates income planning and, more often than not, Social Security claiming strategies also factor into that plan. When Social Security is integral to an income plan, it is extremely important to get the most from it. After all, don’t you deserve to?
With two very powerful planning strategies soon to be taken off the table, some may think that Social Security planning strategies are yesterday’s concern. This couldn’t be further from the truth. Social Security planning, as part of a broader income plan, is more important than ever.
I like when Jeff asks me to contribute to the Cutter Family Finance column; I hope to do it again soon. And remember what Jeff always says, be vigilant, and stay alert, because you deserve more.