Changes in Social Security Rules Impact Retirement Plans
The Freedom of Work Act, which was passed in 2000, changed social security rules to provide benefit options for individuals who either continued to work, or returned to work after filing for social security benefits. Specifically, the rules allowed an individual to suspend their benefits after filing. While suspended, the benefit amount went up each year, earning delayed retirement credits. An unintended effect of the legislation was that retirees started using the file and suspend and restricted application strategies to maximize their benefits.
The strategies primarily came into play, and were most beneficial for wealthier couples who had similar earnings. In a typical scenario under the 2000 rules, Spouse A would file for benefits and immediately suspend them. Then Spouse B would file for benefits, under a restricted application, which allowed Spouse B to collect only their spousal benefit, deferring their own retirement which also continued to earn delayed retirement credits. This allowed spousal and dependent benefits to be paid to Spouse B, while the primary beneficiary’s benefit continued to increase at the 8% annual delayed retirement credit rate for Spouse A.
Social Security reform, contained in the recently passed 2015 budget legislation, means that these strategies are now off the table for most retirees. The reforms are projected to save Social Security $168 billion over the next 75 years. The ability to file and suspend with preserved spousal benefits will end in May 2016. The ability to file for a restricted application will be limited to anyone who turns 62 by the end of 2105. Individuals who have already initiated one of these strategies will not be penalized.
While these strategies were not widely implemented, they had the potential to significantly increase the value of benefits received from social security. Consideration of these benefit filing strategies had become a routine part of financial planning as a way to increase cash available to retirees. Couples who had counted on these strategies in their retirement plan may have a hole to fill in their anticipated budget.
The window of opportunity is still open for some retirees. For those primary beneficiaries, who will be at or near full retirement age before May, 2016, the ability to file and suspend with spousal benefits is still possible. It is also possible for restricted applications to be filed for spousal benefits for individuals 62 or older at the end of 2015.
Whether you are able to take advantage of filing for benefits under the 2000 rules or must abide by the newer 2015 rules, the decision can have a substantial impact on your finances in retirement. Consult a financial professional, who will be in a position to assist in this analysis and help you to understand the implications for your retirement plan.