Commentary by Joel Harris

Major changes are on the horizon for Social Security.  For many Americans under the age of 62, the changes could have a profound impact on your retirement planning.  It is important to understand the new rules and adjust your financial plan accordingly.  Here is a brief overview of the biggest changes coming to Social Security.

On Nov. 2, Congress passed the Bipartisan Budget Act of 2015.  The law was passed to close up some loopholes in claiming strategies that allowed married couples to maximize Social Security benefits.  Starting April 30, 2016, there will be some major changes that affect the “File and Suspend” and “Restricted Application for Spousal Benefits” claiming strategies.

File and Suspend

Under the current law, a filer who is at or past full retirement age (FRA), can file for individual benefits and immediately suspend receiving them.  This allowed a spouse or dependent to collect a “spousal” benefit off their record, in addition to getting an 8 percent simple interest growth to their benefits until the age of 70.

The new law will allow anyone 66 or older to take advantage of this strategy through April 30, 2016.  They can still file and suspend their benefits, which allows an eligible spouse or dependent to collect a benefit off their record under the old rules.  That being said, anyone who is at, or will be reaching full retirement age before April 30, 2016, should seriously evaluate whether or not to file and suspend their benefits before it is too late.

After April 30, 2016, the “File and Suspend” strategy will no longer be in affect.  In a nut shell, for a spouse or dependent to collect a benefit, the original filer will have to file for their own benefit and be required to collect the benefit and forgo the 8 percent simple interest growth under the delayed retirement credits provision.  If an individual files and suspends their benefits, all spousal and dependent benefits will be immediately suspended as well.

Restricted Application for Spousal Benefits

Under the current rules, any spouse who is at or past full retirement age (FRA) and has not elected any benefits, can do one of two things.  If eligible, the spouse can currently choose to collect a spousal benefit only, commonly known as a “restricted application”, or elect their own individual benefits.  When the spouse decided to collect “spousal benefits”, their own individual benefits continue to grow at 8 percent simple interest per year.  This strategy was potentially a great way to enhance Social Security income.

Under the new law, anyone under the age of 62 by the end of 2015 will not have the choice of which benefit to elect when they reach full retirement age.  Regardless of their age and when they elect to take benefits, they will be “deemed” to have filed for the highest benefit.  For example, if Sally, currently age 60 at the end of 2015, has an individual benefit of $1,400 at FRA and is eligible for a spousal benefit of $1,200 at FRA, she will be given the higher of the two amounts when she files for her benefits at FRA.  In this example, Sally will be “deemed” as filing for both, and will be required to take her individual benefit of $1,400 vs. taking the $1,200 spousal benefit and letting her individual benefit grow 8 percent per year until 70.  This is a major development in Social Security planning and needs to be addressed in your overall financial income planning.

For anyone over the age of 62 at the end of 2015, you will be grandfathered under the old rules and will have the ability claim only spousal benefits, if eligible, if you wait until you reach full retirement age.  The key phrase in that sentence is “if you wait until full retirement age”.  If you file before FRA, then you will no long be able to take advantage of filing for a spousal benefit only.

Social Security will have a major impact in your retirement income planning.  These sweeping changes will have profound affects on many American’s retirement plans.  Please work closely with your financial professionals to start making the necessary changes to your financial plans.