Tougher rules for Social Security claiming strategies

Two popular Social Security claiming strategies were severely limited this week when President Obama signed the Bipartisan Budget Act of 2015 into law. Among its many provisions, the new law phases out what's known as "restricted application" and limits "file and suspend," two strategies workers, married couples and divorced individuals have used to boost their payouts.

If you're approaching retirement and had planned on using one of these options, you'll have to revisit your strategies for developing retirement income.

First, let's summarize who is and isn't affected:

  • If you or your spouse have already started your Social Security benefits and don't wish to suspend them, the new rules won't affect you.
  • If you've already started and suspended your benefits, the new rules won't affect you.
  • If you're eligible and request suspension of benefits before April 30, 2016, the new rules won't affect you.
  • If you request suspension of benefits after April 30, 2016, you (and your family, if applicable) will be affected. Potentially affected are married couples and divorced people who may claim benefits based on the earnings record of an ex-spouse. This includes same-sex marriages, which Social Security has recently legally recognized.
  • If you've always been single, or if you're divorced and aren't planning to claim on an ex-spouse's record, the impact on you will be less.

The changes have a short phase-in period, so your year of birth and timing of your claiming elections will determine how you're affected.

The rules are more straightforward if you attain age 62 in 2016 or later. In this case, you can start benefits based on your own earnings record at any time after attaining age 62, and your spouse can do the same for benefits based on his or her own earnings record. You and your spouse do not need to start these benefits at the same time.

Two situations regarding the spouse's benefit deserve special attention:

  • Situation 1: if your spouse would receive a spousal benefit based on your earnings record that's greater than the benefit based on your spouse's own earnings record. This usually happens when the spouse did not work a full career, or earned wages substantially less than the primary wage earner. In this case, the spousal benefit cannot be started until the primary wage earner starts his or her benefit. Your spouse can start the smaller benefit based on his or her own earnings record before you start your benefit. Later, when you start your benefit, your spouse will start receiving the larger spouse's benefit.
  • Situation 2: if your spouse would receive a spousal benefit based on your earnings record that's less than the benefit based on your spouse's own earnings record. In this case, your spouse can't start just the spouse's benefit based on your earnings record. Your spouse must start the benefit based on his or her own earnings record.

If you're divorced and entitled to a benefit based on your ex-spouse's earnings, the above rules also apply to you. But you're entitled to this benefit only if you were married for 10 years or more.

In spite of the new rules, it still makes sense for the primary wage earner to delay the start of Social Security benefits as long as possible, up to age 70, for two reasons:

  1. This strategy boosts the expected payout over the lifetime of the primary wage earner.
  2. It also increases the security of the surviving spouse because most likely, the surviving spouse's benefit will bump up to the benefit the primary wage earner was receiving.

There's no clear rule of thumb regarding the best time to start benefits for the spouse who isn't the primary wage earner. For many spouses, it may be beneficial to start claiming benefits well before age 70, particularly when the primary wage earner is expected to pass away well before the other spouse.

If you attain age 62 in 2015 or earlier, in some circumstances you can still use the restricted application and file-and-suspend strategies. The most common use of these strategies goes like this:

  • The primary wage earner wants to delay receiving benefits as long as possible, until age 70, to receive delayed retirement credits.
  • The primary earner files for benefits but immediately suspends them on or after attaining full retirement age (currently age 66). This enables the spouse to start spousal benefits at that time, provided the spouse has at least attained age 62. The spousal benefits provide some cash flow to the couple while the primary wage earner is delaying benefits.
  • In this scenario, if your spouse has earned a larger benefit based on his or her own earnings record, he or she could file a restricted application that starts only the spousal benefits. This enables your spouse to receive delayed retirement credits on the larger benefit based on his or her own earnings record.

For 180 days following the date the bill was enacted (up until April 30, 2016), you can still implement restricted application and file-and-suspend strategies under current rules as described above, provided that you've attained age 66 by then and your spouse is at least 62 years old in 2015.

That strategy has enabled married couples to boost their lifetime payouts substantially -- by as much as $100,000 or more -- costing Social Security several billion dollars per year.

After April 30, 2016, many of the advantages of file and suspend are eliminated, with a few exceptions. A spouse can still start spousal benefits at the full retirement age, provided the primary wage earner has started receiving benefits. If the spouse's benefit based on his or her own earnings record is larger, your spouse can delay this benefit up to age 70, to receive delayed retirement credits on this larger benefit.

For people born in 1953 or before, it's still a desirable strategy for the primary wage earner to delay benefits, for the same reasons mentioned above for people born in 1954 and after. Similarly, there aren't clear rules regarding the optimal strategy for claiming benefits for the spouse who isn't the primary wage earner. The optimal strategy depends on the age differences between the spouses and their relative earnings.

The file-and-suspend and restricted application strategies have been around only since 2000, when Congress passed legislation that enabled these strategies. Congress eliminated them in the new budget bill because it felt these features were being abused, mainly by affluent couples, and weren't being applied for the original purpose of the enabling legislation.

Regardless of your situation, your best bet is to wait until popular Social Security calculators are updated and see how your situation changes. "It's still worth your time to determine the most effective Social Security claiming strategy for your circumstances," said Andy Landis, author of "Social Security: The Inside Story". "You might still increase your lifetime payout by many thousands of dollars."

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.