What You Should Know About the New Social Security Rules
Social security is already a hot issue, and recent changes have made people really worry about it , making it difficult to get over the resentment and just navigate the facts. Here’s what you should know about change.
If you’re unfamiliar with how Social Security works, it’s okay — the program is complex and often misunderstood , but the basics of getting benefits are simple. Last year, the government signed into law the Bipartisan Budget Act , and that law made some changes to the rules for collecting social security benefits. These changes recently took effect and they ditched some clever strategies that helped people maximize their benefits.
What changed
If you retire after full retirement age, you usually get 8 percent more before age 70. In other words, the longer you wait, the higher your payment will be. SSA calls these deferred retirement loans . Until recently, married couples used several loopholes in regulations to get even more out of these bad loans. The new changes closed the loopholes and eliminated these strategies.
You can no longer “file and suspend” to activate your spouse benefits
Known as the ” file and suspend ” strategy, a loophole allowed couples to defer payment of benefits to one spouse while the other spouse received payment of the same benefit. I know this is a little confusing, but here’s how it worked in practice.
Typically, one of the spouses (usually the one who makes the most money) applied for social security after reaching full retirement age. After they applied, spouse # 2 had to apply for spousal benefit, usually half of the full benefit. Spouse # 1 then suspends benefits, postponing their own benefits and letting their benefits grow 8% each year .
In other words, they apply, take the spousal benefit, and then suspend it. Meanwhile, spouse # 2 gets a check every month, but the main benefit is interest. You get the best of both worlds.
With the new rules taking effect on May 1st, this is no longer an option for most of us. According to SSA :
… if you take retirement benefit and then ask (April 30, 2016 or later) to suspend it to earn deferred retirement credits, your spouse or dependents will generally not be able to receive benefits in your social account provision during suspension. During this time, you will also not be able to receive Spouse Benefit from anyone else’s account.
When you suspend benefits, you can no longer get your spouse benefits. However, the new rules do not apply to people born before April 30, 1950. This gives recent retirees the opportunity to take advantage of the strategy they may have counted on to generate income.
No more “restricted applications” for receiving benefits for future payments
Along with “save and suspend,” some have used a strategy called “restricted applications” to optimize their benefits. Going back to the previous example, this allowed spouse # 2 to receive matrimonial benefits while deferring payment of his own social security benefits, which are separate. Thus, both spouses can receive an annual increase of 8% and still receive a monthly salary.
But no more. The new rule, which applies to everyone born after 1954, removes restricted entries and forces you to enjoy both benefits at the same time. Here’s how the Social Security Administration says :
If you are eligible for benefits as a retired person and as a spouse (or divorced spouse), you must start receiving both benefits at the same time. Previously, this “conditional filing” was only submitted until the full retirement age, which is currently 66 years old. It now applies at any age under 70 if you turn 62 after January 1, 2016.
So if you are applying for one benefit, be it family benefit or your own Social Security benefit, you are applying for both. Sounds fair enough, but here’s the interesting thing: you basically only get the higher benefit. The Motley Fool explains :
… that person will not be able to get spousal benefits if his or her own benefit is higher. Thus, this person will be given the choice to start receiving benefits and lose an 8% annual increase in deferral, or postpone benefits to benefit from these deferred retirement loans, and forgo Social Security income in the interim.
This is not exactly what the SSA claims, but this is the gist of what is happening and why so many people are not thrilled with the change . Couples can lose hundreds or even thousands of dollars every month.
While the “social security crisis” is exaggerated , it is fair to assume that the rules are designed to support social security funds.
What hasn’t changed
People have strong opinions about social security. Many of the articles on change seem to imply that there has been a major overhaul that has eliminated basic benefits. This is not the case – spousal benefits and suspended benefits have not been canceled or even reduced. However, the rules were changed to close some of the loopholes that allowed people to actually enjoy these benefits. These changes can make a big difference for many retirees (or future retirees).
However, the most important finding is that deferred retirement loans still exist. You still get an annual increase if you delay your Social Security benefits after you reach full retirement age. And this bonus is the foundation for most social security withdrawal strategies. In other words, you can still strategize your benefits and get more out of them.
Your own approach to collecting Social Security depends on your own situation: how much you earn in retirement, when you plan to stop working, what your living expenses are, and so on. However, Motley Fool offers one general strategy :
If you want to take advantage of these deferred retirement loans but can’t wait that long to start earning Social Security income, assuming both spouses are working, you can have one spouse (ideally a higher paid one) refrain from receiving benefits. while others have approved them before. This way, you get some income when you need it, while allowing the benefits of higher paid workers to increase.
SSA also has several calculators to help you get an idea of how much your benefit will depend on when you get it and how much you earn.