Since 2000, it has been possible for married couples to collect one spousal benefit while both individuals delayed receiving their own Social Security benefits—in effect, allowing couples to increase the size of their eventual benefits by 8% a year until age 70 while still receiving a modest paycheck each month to tide them over. For many couples, this was the optimal claiming strategy, netting them tens of thousands of dollars in additional lifetime benefits.
But, because of two rule changes in the recent budget deal, this and related strategies won’t be available in the future.
Rule Change #1: If You Suspend Your Benefits, No One Else Can Collect
Under current rules, it is possible to file for and immediately suspend your own benefits. The filing allows your spouse or dependents to collect on your record; the suspending allows your benefit to grow by 8% per year until you decide to collect.
Beginning in May of next year, if you suspend your own benefits, your spouse and dependents won’t be able to collect benefits on your record. (This rule change won’t affect anyone who has suspended their benefits before then. Whether it will cut off the benefits of divorced spouses—a result, it seems, no one in Congress intended—remains to be seen.)
So, you’ll soon need to make a difficult choice: delay collecting benefits until age 70, which will increase your eventual benefit but sacrifice spousal benefits; or, collect benefits now, which will allow your spouse to receive benefits but sacrifice the 8% growth.
Rule Change #2: You Can’t Choose Whether to Collect a Spousal Benefit or Your Own
But that’s not all. Let’s say you’re married to someone who has begun collecting benefits. Under current rules, if you’ve reached full retirement age (between 66 and 67, depending on birth year), you can file a “restricted application” to receive only a spousal benefit, allowing you to delay, and thereby increase, your own benefit until age 70.
With the new rules, anyone born in 1954 or later will no longer have this option. Instead, when you file, you’ll need to take whichever benefit is bigger: the spousal or your own. You’ll still be able to delay your own benefit until age 70, increasing its size, but you won’t be able to collect spousal benefits while you wait.
The Bigger Picture
With aging demographics placing pressure on Social Security, it’s not surprising that the rules—perceived by many as loopholes that benefit wealthier individuals—have been changed. Besides the concerns about the system’s solvency and fairness that the old rules raised, there’s another rationale for the change: once the new rules are fully phased in, they should greatly simplify the Social Security claiming process.
But, in the short-term, the changes add uncertainty and confusion, and will complicate the lives of anyone who has been planning to use one of the soon-to-be-disallowed strategies. If you are one of these people, it is important to talk with your financial advisor about how the changes could affect your retirement.
By Jeffrey P. Ebert, PhD, CFP® / Financial Advisor
Jeff holds the CFP® designation and earned his doctorate in social psychology at Harvard University. Jeff has expertise in retirement and education planning.
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