Congress complicates Social Security strategies

Kern Business Journal
February 16, 2016

Once upon a time – not so long ago – Americans nearing their full retirement age of 66 walked with a bit of a swagger, as they anticipated using tactics that could expand their Social Security income by many tens of thousands of dollars.

They planned to use strategies created when Congress passed the Senior Freedom to Work Act of 2000, which was designed to encourage cash-strapped seniors to work well into old age to help stretch their retirement savings.

Relatively few seniors knew about these windfall strategies. Basically “those in the know” were aging boomers who closely monitored their retirement nest eggs and who had alert financial advisers helping them.

But with little fanfare, Congress passed the Bipartisan Budget Act on Nov. 2, 2015, which eliminated these strategies and left a handful of eligible seniors only until April 30, 2016 to claim lucrative benefits.

The Budget Act made several nuanced changes to Social Security. But the ones that should mostly concern seniors are those that eliminated the “file-and-suspend” and “restricted application” tactics. Here is how these tactics worked:

File-and-suspend – My client Bill is 65 years old and still working. He plans to retire next year, but he wants the amount of his monthly Social Security checks to continue to significantly grow. For this to happen, he must delay collecting Social Security until he is 70.

But Joan, Bill’s wife, is just 61. She has worked too few years to qualify for her own Social Security. Joan wants to begin receiving her spousal benefit checks, which are based on Bill’s benefit calculations, at age 62. So under the old rules, Bill could file for his Social Security and immediately “suspend” his application. This would allow Joan to collect her spousal benefits, while Bill’s benefits continue to multiply.

File-and-suspend applied to more than spouses. I even had a client who had married late in life use the tactic to help fund his two young children’s college educations. An attorney, my still working client filed for Social Security at 66 and then suspended his application in order to obtain monthly “dependent checks” of about $1,100 each. The money, which the children will receive until they are 18 years old, is being set aside in education accounts.

With the stroke of a pen, the file-and-suspend tactic has been eliminated for most retirees. Lucky for Bill, he will turn 66, the full retirement age, on March 4. He has been “grandfathered into the system.” If he acts quickly, he can still reap expanded Social Security benefits using file-and-suspend.

Restricted application – My clients Bob and Mary are both 60 years old. At the full retirement age of 66, Bob expects to receive $25,000 a year from Social Security and Mary expects to receive $20,000. Their plan was for Mary to file for her Social Security and Bob to apply for spousal benefits, which would have been about $10,000 a year. Then, when Bob reached 70 years old, he would apply for his own Social Security, which would have grown to an expected $39,600.

Under the new rules, Bob can no longer collect restricted spousal benefits when he reaches 66 and let his own benefits grow.  When the couple files for Social Security, each will receive the benefit that is the highest based on their individual entitlements.

Social Security provides at least half the income to Americans aged 65 years and older. For about 25 percent of that age group, it accounts for 90 percent.

All Americans, whether they are living on the “financial brink,” or amassing hundreds of thousands of dollars to fund their retirements must carefully include Social Security in their future income strategies.

A critical decision that must be made is when to “retire” and begin collecting Social Security benefits. When lucrative loopholes existed, such as the file-and-suspend and restricted application tactics, most common sense advice was for retirees to delay until at least 66, and better until 70 to file for Social Security.

This brave new world somewhat complicates the decision. Many factors can enter into the consideration, including longevity risks. For some, filing early might make sense.

Several online resources, including MaximizeMySocialSecurity.com, can help people nearing retirement evaluate their options.

But it is critical to act quickly and seek advice to take advantage of grandfathered benefits and to adjust future retirement saving strategies.