Last November, the Bipartisan Budget Act of 2015 (BBA) was signed into law averting a United States default and deferring further discussion of U.S. debt and spending levels until after 2016's presidential and congressional elections. While the new law simplifies some issues for our nation's leaders, it may complicate others because the BBA includes provisions that affect Social Security retirement benefits.1
Social Security rules are changing - again
When the Senior Citizens Freedom to Work Act of 2000 (SCFWA) was signed into law, it eliminated the Social Security earnings test for Americans who reach full retirement age and want to continue to work.2 (Full retirement age for people born after 1943 is about 66. For those born after 1960, full retirement age is 67.3) The earnings test, which remains in place for Social Security beneficiaries who are younger than full retirement age, causes $1 of benefits to be withheld for every $2 in earnings above the annual earnings limit.4
While the SCFWA was a welcome change for many Americans of retirement age, it changed the way taxpayers approached Social Security benefits. Prior to the SCFWA, many people thought, as the Social Security Administration suggested, they would receive approximately the same amount of benefits whether they retired early, at full retirement age, or later. Early retirees received lower benefit payments than people who retired at full retirement age or later, and late retirees received higher payments than people who retired at full retirement age or earlier.3
While that may have been true at one time, rapidly increasing longevity caused some experts to reach a different conclusion. Laurence Kotlikoff, a professor of Economics at Boston University, wrote:5
"For a high-earning, 60-year-old couple...if they wait until 70 to collect their retirement benefits, they will still be up $350,000 compared to taking their retirement benefits at 62. That's the power of being able to wait to collect a 76 percent greater check every month from age 70 through 100 if you live that long."
One of the unexpected consequences of the SCFWA was it created loopholes in the Social Security system. By employing specific claiming strategies, taxpayers could increase the amount of lifetime benefits they received from Social Security.6
Receiving higher benefits helped Social Security recipients; however, paying higher benefits had the potential to put additional stress on an already taxed Social Security system. CNBC reported a paper published by The Center for Retirement Research at Boston College estimated these strategies could cost roughly $10 billion each year.7
That claim has been disputed by other experts in the field who argue few new retirees are able to delay taking benefits long enough to truly maximize their income from Social Security. The Decision to Delay Social Security Benefits, a 2012 paper written by John Shoven, Director of the Stanford Institute for Economic Policy Research, and economist Sita Nataraj Slavov, reported:8, pgs 2 and 33
"We have shown that delaying Social Security is actuarially advantageous for a large subset of the population...However, we find little empirical evidence that actual claiming behavior is related to the actuarial advantage of delay. Indeed, most individuals appear to claim shortly after reaching age 62 or stopping work. Labor supply appears to be the primary determinant of the claiming decision. We do find a consistent relationship between education levels and delayed claiming, possibly because education may be associated with financial literacy or a longer life expectancy."
While there is a clear monetary advantage to delaying Social Security benefits, few people actually chose to delay, so the cost to the system may not have been as high as projected.
BBA changes claiming rules
Regardless of analysis suggesting the cost of claiming strategies could be much lower than believed, the BBA's new rules eliminate two claiming strategies - "Claim and Suspend" and "Claim Now, Claim More Later" - rather abruptly.
- Claim and Suspend (a.k.a. file and suspend strategy). The strategy allows individuals to claim and then voluntarily suspend their Social Security benefits. Since they suspend the benefits, they can accrue delayed retirement credits. When a working person claims and suspends benefits, his or her spouse can claim spousal benefits, allowing a couple to receive benefits today, and receive benefits enhanced by delayed retirement credits in the future if the working spouse claims benefits after full retirement age.9 The new rules established by the BBA will make Claim and Suspend strategies unavailable beginning May 1, 2016. As a result Americans who are at (or past) full retirement can take advantage of the opportunity, but they must claim and suspend before April 30, 2016.10
- Claim Now, Claim More Later (a.k.a. restricted application strategy). This strategy allows married individuals to claim spousal benefits from Social Security while not claiming their personal benefits. Delaying personal benefits means they are able to earn delayed retirement credits. When they reach full retirement age, they can choose between receiving their personal benefits or receiving their spousal benefits.9 The new rules eliminate this strategy at the end of the year. Americans who reach age 62 in 2016 may be able to employ it, but younger Americans will not have the opportunity.11
If you are currently employing these strategies, you may be grandfathered. More information will be available when the Social Security Administration offers its interpretation of the new rules, and that should happen before the end of this year.12
If either of these strategies is a part of your current retirement plan, and you are not at an age where you can execute the strategy, you may want to work with a financial professional to redesign your plan.
This material was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.