The Bipartisan Budget Act of 2015 that was fast-tracked (think bullet train) and passed by Congress last week and signed by President Obama yesterday includes provisions that will permanently reduce Social Security benefits for millions of people. The bill comes on the heels of Social Security Administration’s October 15th announcement that there will be no cost of living adjustment, or COLA, for Social Security benefits in 2016.
Citing unintended loopholes in the current law as the reason for the change since becoming a target for repeal with the release of the fiscal 2015 budget by the White House in March of 2014, the legislation effectively eliminates the popular “file and suspend” claiming strategy that enables married individuals to receive Social Security benefits that they wouldn’t otherwise be entitled to receive.
Thanks to an eleventh-hour amendment to the House Budget bill, those currently collecting benefits using the file and suspend strategy may continue to receive them. In addition, anyone over full retirement age or reaching full retirement age in the next six months may implement this strategy. Individuals who don’t fall into either of these two categories and included this technique as part of their retirement income plans aren’t as fortunate. They will be forced to revise their plans, and, in many cases, retire later than originally planned.
6-Month Window of Opportunity
For the next six months, a married couple can choose to have one spouse file for benefits upon reaching full retirement age, which is currently 66, and immediately suspend receipt of those benefits. This enables the spouse, usually the lower-earning individual, to collect a spousal benefit up to 50% of the file and suspender’s full retirement age benefit, with 50% applying if the spouse has also reached full retirement age.
Spouses of file and suspenders who turn 62 before December 31, 2015 can begin collecting a spousal benefit beginning at any time, not just for the next six months. If the spouse of the filer turns 62 in 2016 or later years, however, he/she will be forced to receive the larger of his/her retirement benefit or spousal benefit due to the “deemed filing” rule.
In addition to a spousal benefit, the file and suspend strategy enables the file and suspender to earn “delayed retirement credits,” resulting in an increased benefit of 8% per year plus COLAs until age 70. This results in an additional benefit of up to 32%, plus COLAs assuming full retirement age of 66 and the benefit start date is deferred to age 70.
After the legislation goes into effect, you will still be able to defer your start date beyond your full retirement age to take advantage of delayed retirement credits; however, your spouse won’t be able to receive his or her spousal benefit until you begin to receive your benefit. Assuming a full retirement age 66 monthly benefit of $2,000 for the higher income earner with benefits deferred to age 70 and assuming the spouse has also reached full retirement age, the inability to use the file and suspend strategy would result in a loss of benefits of $48,000 (50% x $2,000 x 48 months) plus COLAs.
Earlier Benefit Claiming
Many married couples who were planning on using the file and suspend strategy will file for their Social Security benefits earlier than they would otherwise do in order to meet their expense needs as a result of the elimination of this valuable retirement income planning tool. The timing of filing for benefits could change in at least two different ways.
One possibility is that the higher earner will continue to defer filing for his benefit beyond full retirement age to as late as age 70. His spouse will file for a benefit upon reaching full retirement age based on her earnings record assuming she is eligible to collect her own employment-based benefit.
A second possibility is that the higher earner will apply for benefits upon reaching full retirement age. Although his benefit will stop growing with the exception of potential COLAs, this will enable his spouse to collect a spousal benefit assuming that this amount is less than the spouse’s benefit based on her earnings record. The couple may end up receiving larger lifetime benefits in this situation if the higher earning spouse dies before he would have filed for benefits if the file and suspend strategy was still available.
Future Benefit Reductions and Potential COLA Stagnation
Although the changes included in the Bipartisan Budget Act of 2015 pertaining to Social Security are projected to result in estimated savings of $81 million to the federal government over the next ten years, the long-term solvency of the system hasn’t been addressed. There are several other proposals on the table and others in the works that, if enacted, will result in additional widespread benefit reductions.
Also worth noting, assuming that the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, continues to be used for calculating potential COLAs, Social Security recipients’ benefits may continue to remain stagnant in the future. The average COLA has been 1.2% since 2008, including three years with no increases. The Experimental Price Index for the Elderly, or CPI-E, which gives more weighting to housing and health care and is getting more attention recently as a possible replacement for the CPI-W, would result in opportunities for higher potential COLAs.
Follow the Latest Developments
There will be a lot of media and other commentary in the coming days and weeks about intended and unintended consequences as well as planning opportunities pertaining to the changes to Social Security brought about by the Bipartisan Budget Act of 2015, including several changes not addressed in this post. This is the largest reform to Social Security since the Citizens’ Freedom to Work Act of 2000 which was responsible for the file and suspend claiming strategy.
As my clients and others who read my Retirement Income Visions™ posts and MarketWatch RetireMentors’ articles know, my writings cover the spectrum of retirement income planning, including Social Security. If you want to follow the latest Social Security developments and obtain an excellent education in the process, I recommend that you read Laurence Kotlikoff’s PBS NEWSHOUR and Mary Beth Franklin’s InvestmentNews columns. Both are excellent sources of information about this complicated subject.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.