The recent budget bill signed into law on November 2 contained some surprising changes that limit Social Security claiming strategies. The legislation made some major changes to the “File and Suspend” and associated “Restricted claim for spousal benefits”. These strategies allowed retirees to optimize their Social Security payouts, and many advisors had incorporated these into clients’ retirement plans. These changes take effect beginning in May, 2016. Here is a summary of the changes:
Double Claiming: In this strategy, a spouse could claim benefits twice. First, he or she would collect spousal payments worth half of the higher earner’s benefit amount. Then, once the spouse reached full retirement age (or later), he or she would switch to their own, higher benefit. Since benefits are higher when claimed at full retirement age, this enabled the spouse to collect some benefits early and then maximize their own Social Security benefits. A 2009 analysis by the Center for Retirement Research at Boston College found that if every eligible person used this strategy, it would cost the Social Security program about $10 billion a year. Now, Social Security claimants will only be allowed to file once for benefits. They will receive benefits based on either their own earnings record or a spousal benefit, whichever is higher.
No Payments for dependents if you suspend your payments: In the past, you could claim Social Security benefits and immediately suspend them. This allowed a spouse and dependent children to claim benefits based on your work record. In the meantime, by suspending your payments, you could continue to accrue delayed retirement credits that allow you to claim larger payments later on in retirement. The Center for Retirement Research at Boston College estimates that couples using the claim and suspend strategy cost the program about half a billion dollars per year. Now, if you suspend your Social Security payments, your spouse and children who receive payments based on your work record will no longer receive them until you start your payments again.
Claiming Options that are still available:
- Married individuals are still eligible to claim payments worth up to 50 percent of the higher earning spouse’s benefit, if that amount is higher than benefits based on their own work record.
- Widows and widowers inherit their spouse’s benefit payment when it is higher than their existing benefit.
- All workers also have the option to increase their monthly Social Security payments by delaying claiming them up until age 70. Delaying Social Security payments past full retirement age increases benefits by approximately 8% per year up to age 70.
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