(November 21, 2015) Social Security planning just got a little bit trickier for some of us. Many investment advisors, financial planners, and individuals evaluating their own retirement were surprised by the abrupt elimination of a pair of Social Security-claiming strategies. Without notice and without public discussion, Congress eliminated the future use of two strategies (known as “file-and-suspend” and a “restricted application”) as part of the recent budget deal. In about six months, these options will no longer be available.
What Are These Strategies?
The soon-to-be-extinct strategies came into being during the Clinton presidency after the passage the Senior Citizens’ Freedom to Work Act of 2000. The purpose of the law was to encourage seniors to work past “full retirement age” (this is the age in which one is entitled to full social security benefits – currently, it is 66 or older). All individuals, regardless of situation, that delay the receipt of their benefits after full retirement age receive a “credit” (or increase) to their future benefits.
In essence, the “file-and-suspend” and “restricted application” method enabled one social security beneficiary (at full retirement age) to collect a “spousal” benefit while their spouse delayed the receipt of their own benefits. For married couples with similar income histories, it is likely that they both would have elected to receive their own benefits (it is generally higher than the calculated “spousal” benefit). However, for spouses with a significant disparity between their lifetime earnings, the couple may benefit from the lower-earning spouse taking the “spousal” benefit at full retirement age while the higher-earning spouse delays the receipt of their benefits. Each year that the higher-earning spouse delays receipt of their own benefits, the value of their future benefit is increased. In many cases, the “file-and-suspend” or “restricted application” method allowed couples to maximize their social security benefit.
Why Were These Strategies Canceled?
While these canceled strategies were perfectly legal to elect and use by Social Security beneficiaries, significant financial and political undercurrents were the likely drivers of Congress’ decision. Financially, the Social Security system is in dire straits. Without reform, the benefits that so many will rely upon in the future will be in jeopardy. The system simply cannot afford to pay out more than it has to (even if that means changing the law from time to time). Politically, the Obama administration has long criticized these strategies, claiming the tactics were largely utilized by the wealthy. Based on workers’ historical income (and contributions into Social Security throughout their working years) versus what one actually receives in benefits, some would argue that the cancellation of these equalization strategies is yet another step towards implementing additional “means-testing” for governmental benefits (Social Security, healthcare, etc.).
What Can You Do About It?
Be proactive. Planning for retirement is difficult; planning for retirement when someone else can change the rules on you requires expert guidance. It’s possible that you’ve built these eliminated strategies into your retirement plan, but now have to go back to the drawing board. Many couples will now have to revisit and adjust their retirement income projections, which may alter anticipated retirement dates, spending levels in retirement, the return required from investments, and others considerations.
Social Security planning should be integrated into any comprehensive retirement plan. Social Security planning is also overly confusing and complicated. Fortunately, Sunrise Advisors helps our clients assess all available Social Security strategies as part of a tailored, personalized retirement plan. And, our industry-leading planning software stays up-to-date with any changes to the law (tax, Social Security, estate tax, etc.) so you can stay ahead of the curve. If you’d like to explore how these changes affect you or if you simply want to “fine tune” your personalized retirement plan, please contact us at (913) 681-0215 or firstname.lastname@example.org.