Recent Social Security Changes

I want to talk about a couple of Recent Social Security Changes that went into effect last year in 2016 as part of the Bipartisan Budget Act of 2015. It essentially changed what they referred to as unintended loopholes. The file-and-suspend strategy and filing a restricted application. So I’m going to go through and explain a little bit about what those strategies were originally intended for, and how those strategies worked, and then I’m gonna talk about the rule changes, because we’ve been getting some questions here at our office about that, and I think there’s been a little bit of confusion.

So first of all let’s talk about the file-and-suspend rule. So this is basically a strategy where somebody could file for their social security benefits, and then immediately suspend their benefit. Now why would somebody do that? Well there’s two primary reasons that somebody would use file-and-suspend.

Number one is that if they do it after their full retirement age, they can earn delayed retirement credits from age 66 to as late as age 70. And many of you know that delayed retirement credits grow your social security benefit by 8% per year. So that was the first reason, to get those delayed retirement credits.

The second reason that you file and then suspend your benefit, was so that your spouse or somebody else could collect benefits based off of your work record. So without filing for benefits your spouse is not eligible for those spousal benefits. So that was the second primary reason that somebody would do that.

Actually there’s a third reason that somebody would file and suspend, and that is to basically use your Social Security benefit as a little bit like a life insurance policy. So let’s say that you have your Social Security benefit suspended but then something changes, let’s say unfortunately maybe you get diagnosed with a terminal illness and now you want to change your mind. Well having suspended those benefits, you could go back to Social Security and request all of those suspended payments and receive those in a lump sum. So in order to use the file-and-suspend strategy, you needed to be at least 66 years old, and you needed to have filed and suspended your benefits before April 30th, 2016. Now that date has come and gone, so if you didn’t file-and-suspend before that date then you no longer have this strategy available to you.

After April 30th, 2016 you can still file-and-suspend for benefits, but in order for your spouse or somebody else to be able to collect benefits based off of your work record, you need to actually be collecting your benefits. So they would not be eligible for those spousal benefits if you had those benefits suspended.

So why would somebody still want to suspend their benefits? We’re going to use an example here. We’ll say Dan was eligible for a $2,000 a month Social Security benefit at his full retirement age, at age 66. But he decided to collect benefits early, so he turned his benefits on as soon as he possibly could, at age 62. And he took a 75% discount to what he would have been eligible for at his full retirement age. So maybe Dan’s thinking now, “Hey I wish I would’ve waited until my full retirement age to collect those benefits”.  Well, Dan can still use a file-and-suspend strategy or suspend his benefits and still earn delayed retirement credits up to age 70. In this case he’s going to get 132% of the amount that he is collecting, 132% of this $1,500, and that’s gonna bump him up to $1,980 per month. So by suspending from age 66 to age 70, Dan is now essentially almost getting back, or within $20 getting back up to what he would’ve been eligible for at his full retirement age. So that would still be one strategy that you can do to use a file-and-suspend right now even after the rule change.

The second rule change that took place as a result of the Bipartisan Budget Act was they eliminated, or they’re phasing out I should say, their restricted application filing status. So restricted application basically is where a spouse would file for only their spousal benefits and let their own benefits grow.

So let’s say Dan’s wife, Cindy, worked a little bit and she has a pretty decent Social Security benefit on her own work record. And let’s say she’s eligible for $1,000 a month at her full retirement age of age 66. So filing a restricted application, Cindy could essentially say, “I don’t want to take my benefits, but I want to take my spousal benefits. Because her husband Dan is eligible for $2,000 a month at his full retirement age, Cindy’s eligible for $1,000… a month for a spousal benefit and that allows her to grow essentially her own benefits and earn delayed retirement credits on her benefit. So her $1,000 benefit that she’s eligible for on her own work record would bump up to $1,320. She would get that 132% increase. So that would be the strategy that you could do filing a restricted application.

They did make some changes to the restricted application under the new rules for the Bipartisan Budget Act of 2015, you needed to be 62 years old or older by December 31st, 2016. And then you’ll be grandfathered in to be able to file this restricted application and get spousal benefits only. But you have to wait until your full retirement age, age 66 to be able to file that restricted application.

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