By Jenny Kim, Manager
In 2000, Congress passed the Senior Citizens Freedom to Work Act which introduced a new concept of“Voluntary Suspension”. This concept allowed someone who had started collecting social security benefits to suspend for a certain period of time or postpone benefits until later. Prior to this time, claiming social security when someone turned 62 was the norm. By 2009-2010 claiming strategies to obtain more social security income had developed. This went mainstream through exposure by the media and financial planners.
The crux of these strategies revolved around the requirement that a spousal benefit is only able to be collected from a spouse who was collecting or had suspended benefits. The File and Suspend concept allowed a person at full retirement age or older to apply for retirement benefits and then suspend payment of those retirement benefits. This allowed the spouse to collect spousal benefits while allowing his or her own retirement benefit to grow by delaying it. Later on, the individual would restart his or her benefits with an increase for every month retirement benefits were suspended. A second concept is known as the Restricted Application. This concept assisted one spouse to file for spousal benefits at full retirement age so their own benefits would grow larger by delaying and then switching to his or her own larger benefit. This was also known as the claim some now and claim more later technique.
Through the sudden and unannounced passage of the Bipartisan Budget Act in November 2015, President Obama succeeded in closing these social security loopholes. This Act phased out two strategies that eliminated a couple’s ability to coordinate benefits. It did not affect those already receiving social security benefits or widower benefits. This act eliminated the File and Suspend technique, except for those who were 66 or older and filed by April 29, 2016.
Only those who were 62 years old by January 1, 2016, born on or before 1/1/1954, could still use the Restricted Application to get spousal benefits while delaying their own benefits. This application also applies to divorce or ex-spouse benefits. It occurs when a retiree turns full retirement age (FRA), even if filing doesn’t occur until up to 4 years from 1/1/16. Those in this age category are in an important transition period where two years remains for those born before 1954. These individuals should consider using the Restricted Application technique.
For those who were still under 62 by the end of 2015 or born January 2, 1954 or later, the new law extended the concept of “deemed filing” to those at full retirement age and beyond. It had previously been applied only to those not at full retirement age. This means that if an individual is eligible for benefits both as a retired worker, as a spouse, or divorced spouse when they apply for Social Security benefits, they are deemed to be filing for any benefits that they are eligible for. This may be an individual, spousal, or a survivor benefit and they will collect the highest of these benefits. In order to get these spousal benefits, a couple must file for all benefits. This change by the BBA of 2015 preserves the incentives to delay collecting benefits, but does not allow a person to receive one type of benefit while earning a bonus for delaying the other benefit.
Determining when to begin collecting Social Security benefits is a complex and personal decision. Planning ahead and weighing your option requires research and time to consider the ramifications. Making an informed decision, the first time, is very important to maximize your benefits. Due to December 8, 2010, the new ruling by SSA limited the time window during which you can change it. An individual has 12 months to withdraw an application and pay back any social security they have received in order to refile at a later date.
Claiming too early should be avoided as well since you are claiming a lower amount for life. When an individual claims their social security after the 12 month window has passed, the benefit is fixed for life aside from Cost of Living increases. The individual may have claimed a lower amount for a greater number of years. However, if an individual is fortunate to have longevity, they may be forfeiting a significant amount of total social security income. Furthermore, if an individual is the primary wage earner, the amount of spouse or survivor benefits a spouse may receive is fixed for life.
If an individual claims at age 62, they are penalized and receive only 75 % of their Primary Insurance Amount (PIA) or monthly benefit. At 66, they would receive 100% of their PIA. Each year an individual delays between ages 66-70 (FRA), they receive a bonus of 8% of their PIA per year and up to a maximum of bonus credit of 132% of their PIA if they file by age 70. Remember, if an individual decides to collect before FRA and decides to go back to work, this could result in reduced Social Security payments.
Of course, the decision to claim early or late should be weighed against life expectancy. Life expectancy calculators can be used to estimate this based on a person’s specific risk factors. There is a break even age where the two strategies produce the same amount of total social security income. Each retiree needs to optimize their own personal claiming strategy. The most recent changes to the law and factors such as earnings history, relative ages, life expectancy, relationship status, and the existence of pension income or minor children are all factors that will determine the best strategy.
This article explains only some of the concepts and issues regarding Social Security benefits. If you have further questions or concerns, please contact the Social Security Administration at 1.800.772.1213 or contact your CST tax adviser today.