As soon as the news leaked out that a pending congressional budget deal would kill existing Social Security claiming strategies for almost everyone, I was inundated with questions from financial advisers and individual consumers about what it all means.
Was I surprised? Yes. Absolutely gob smacked!
Will retirees who already exercised such creative claiming strategies such as file and suspend or filing a restricted claim for spousal benefits before this legislation is signed into law be grandfathered? It appears that in most cases, they would not be protected.
First, let me explain what the legislation says and then what it means. Please keep in mind, this situation is fluid. The legislation passed the House 222-167 Wednesday and now moves on to the Senate, where it is expected to win support and be signed by President Obama.
It all started with Mr. Obama's budget proposal for fiscal year 2015. In that document, the administration called for changing the rules to eliminate “aggressive Social Security claiming strategies which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.”
Fast forward to this week. During backroom negotiations, congressional leaders of both parties and administration officials worked out a budget compromise to keep the government running for the next two years and avoid a shutdown before the government's borrowing authority runs out next week. But the massive legislation also contained a few nasty surprises.
Sec. 831 of the document is titled “Closure of unintended loopholes.” The document summary explains that this provision “closes several loopholes in Social Security's rules” regarding filing a restricted claim for spousal benefits and suspending benefits “in order to prevent individuals from obtaining larger benefits than Congress intended.”
There are two effective dates in the proposal. One protects anyone who is 62 or older by the end of this year to continue to claim just spousal benefits when they reach full retirement age. But that assumes their spouse has actually claimed and is receiving Social Security benefits.
However, if one spouse has filed and suspended benefits in order to trigger a spousal benefit, all bets are off.
That's because a separate part of the proposal would eliminate the current usage of “file and suspend” that allows someone who has reached full retirement age to file for Social Security benefits but does not collect them in order to trigger benefits for a spouse or dependent child. Meanwhile, the retiree's own benefit would continue to grow by 8% per year up until age 70.
Originally, the proposed legislation would change the rules for filing and suspending benefits starting six months after the legislation is enacted and it seemed as if it would affect everyone — even those who have already filed and suspended benefits. Under the new rules, if someone files and suspends their retirement benefits, it would also stop any spousal or dependent benefits on their record until that person actually began collecting Social Security benefits.
However, Bloomberg reported late Wednesday that “the deal was amended so it affects only retirees who file for benefits in the future, and the change wouldn't go into effect for six months.” The Bloomberg report said, “That means older workers who want to use the strategy could still do so until early next year."
It also appears that anyone who turns 62 in 2016 or later would lose the right to collect just spousal benefits because the new provision extends the “deeming” rules that require those who are entitled to both a retirement benefit and a spousal benefit to file for both and be paid the higher of the two amounts.
Under current law, once you reach the full retirement age of 66, you can restrict your claim to spousal benefits and collect half of your mate's full retirement age benefit while allowing your own retirement benefit to continue to grow by 8% per year up to age 70 and then switch to your own benefit. The new rules would eliminate that option.
At this point, it appears that widows and widowers will still have the option to claim a survivor benefit first and switch to a retirement benefit later, or vice versa, in whichever order would result in a larger benefit.
There are still many unanswered questions at this point, and I will update readers as information becomes available.