Social Security Benefits for Couples: Understand the Changes and Take Advantage of Transition Planning
The Nov. 2, 2015, passage of the Bipartisan Budget Act of 2015 has changed the Social Security landscape for married couples. It specifically affects those who had been considering what are called file-and-suspend strategies or restricted application for spousal benefit strategies. These strategies center on whether individuals decide to take retirement before or after full retirement age. Some couples can still take advantage of these strategies if they meet certain requirements before April 30, 2016. Experts from the Virginia Society of Certified Public Accountants (VSCPA) explain what these changes mean and how to plan around them.
In general, full retirement age (FRA) starts at 65 for individuals born prior to 1938, and increases to age 67 for individuals born in 1962 or later. Some people begin collecting before full retirement age and receive a permanent benefit reduction. People who delay collecting retirement benefits after FRA can receive up to an 8 percent annual increase in benefits until the age of 70. It is these factors that played into the file-and-suspend strategy in the past, and will continue to affect decisions on when it’s best to begin claiming Social Security.
About the Bipartisan Budget Act
Prior to the Bipartisan Budget Act, the file-and-suspend strategy was used as a way to maximize a couple’s Social Security benefits, calculating benefits after one or both individuals reached full retirement age. The act did include a window to plan around the change, which may accelerate your plan for filing for benefits if you are eligible. Couples planning to use the file-and-suspend strategy should speak with their financial planner and revisit those plans to understand all the options. It’s also a good idea to check in with your financial planner regularly to ensure that you’re on track to meet your retirement goals or check that your funds are going as far as you anticipated in retirement.
Anyone who has already reached FRA and has initiated a file-and-suspend strategy will not be affected by the law change. Prior to passage of the act, a qualified individual in a couple who had reached FRA could file for his or her benefit and immediately suspend it. An eligible spouse, also upon reaching FRA, could then file a restricted application for his or her spousal benefit only. This strategy allowed one spouse to collect a spousal benefit while either or both suspended their own benefits, earning delayed retirement credits (DRC) on their primary insurance benefit (but not past age 70).
Anyone aged 65 ½ as of the enactment of the law, and who will reach FRA within 180 days after enactment, will retain the ability to use the file-and-suspend claiming strategy, but must do so before April 30, 2016. A spouse who has reached FRA can then choose to collect on his or her own record or the spousal benefit, but by choosing the spousal benefit they earn DRCs on their own record by delaying. This may be beneficial when both spouses have similar earnings records. Only one spouse can collect a spousal benefit.
Anyone who turns age 66 after April 30, 2016, will still be able to suspend an application, but doing so suspends all benefits payable under that individual’s earnings record, including the spousal benefit. This eliminates the strategy for married individuals described above. Further, prior to the act, a recipient filing and suspending could later file for their benefit going back to the suspended date and receive a lump sum payout. Now, the ability to receive a lump sum payment of accrued benefits is limited to a maximum six-month retroactive reinstatement.
Restricted Application for Spousal Benefits
The change affecting the age criteria for filing a restricted application is different than that for file-and-suspend. Anyone born in 1953 or earlier, and who turned age 62 by the end of 2015, is grandfathered under the old rules and retains the ability to file a restricted application. When a member of a couple files for benefits prior to FRA, the higher of the worker’s benefit or the spousal benefit, if available, will be paid. Someone who was age 62 by the end of 2015 and waits until FRA to collect will continue to have the choice of filing on their own record or filing a restricted application on a spouse’s record if that spouse already filed. This will delay filing on their own record, and they can accrue delayed retirement credits.
Under the new rules, those born after 1953 will no longer have the opportunity to file an application for Social Security benefits restricted to a spousal benefit. An application for retirement benefits filed by anyone not grandfathered is deemed an application for benefits under the individual’s own earnings record or the spousal benefit, whichever is greater.
Ongoing Planning Considerations
The decision on when to claim requires significant consideration: there is the alignment of benefit claiming between spouses of different ages, as well as the issues of cash flow and longevity expectations. Keeping all the possible options straight can be difficult, but your CPA can help. For more retirement resources, consult a local CPA.