Changes to Social Security

Daniel J. Dorval, CFP® | November 09, 2015

The recently signed two year budget deal included important changes to Social Security that may have a material impact on the financial plans of many baby boomers.  Two strategies couples used to help maximize Social Security benefits will be coming to an end.  Options to "file and suspend" and "restricted application" are being eliminated which may have an adverse impact on the planning of many married couples.  It is important to note if you have never been married, your Social Security benefits are not being impacted by these changes.  Also, if you have been widowed, your survivor benefit options will remain the same.

The "file and suspend" option was used mainly by wealthier couples where both spouses hoped to maximize Social Security payments over a long life expectancy.  Once you reach full retirement age, you can file for Social Security, but suspend the payments thus allow a family member (usually your spouse) to begin collecting benefits based on your earning record.  Under the new law, you can still file and suspend your benefit to allow your potential payment to grow, but the suspension also applies to the ability of a family member to claim on your earnings record.  This effectively means the file and suspend option is no longer a viable strategy.  In our experience, the "file and suspend" approach was not commonly used because most of the people we help do not have the ability to wait that long before collecting Social Security and still maintain quality of life. 

The other strategy being eliminated is called 'restricted application." We see this strategy used much more frequently and have suggested many couples consider this approach to help maximize their combined benefits.  Under "restricted application" you are collecting your spousal benefit first while allowing your own benefit to continue growing.  The classic example is a married couple where both spouses have reached full retirement age.  One spouse files to collect their full benefit, but the other spouse files a restricted application to collect only their spousal benefit while allowing the benefit on their own earnings record to accrue at 8% per year up to age 70.  That spouse would then refile for their own, much larger, Social Security benefit.  It was a "claim now, but claim more later" type of strategy that worked well for many couples.  Under the new law, if you are entitled to both a retirement benefit on your own earnings record and also a spousal benefit because you are married (or divorced after at least 10 years of marriage) to someone who is eligible for benefits, your filing will be deemed to be for both benefits at the same time and you will automatically receive the higher of the two amounts.  You will no longer be able to claim spousal benefits only.

So who does this effect?  If you have already implemented these strategies, you will be grandfathered so nothing will change for you.  If you will be 62 or older by the end of 2015, you will still have the option of using the more popular "restricted application" strategy.  If you are younger than 62, the option will no longer be available.  Spouses who are 66 or will turn 66 by April 30th of 2016 can still file and suspend their Social Security benefits.  This leaves an approximate six month window for people in this limited age category.

While there are fewer planning options available, Social Security still remains a complex program that requires careful consideration and planning to make sure you are maximizing this important retirement resource.