Mary Beth Franklin

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Seniors see Social Security changes as benefit cuts

New rules require weighing claiming strategies against competing income goals

Nov 23, 2016 @ 12:18 pm

By Mary Beth Franklin

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Lawmakers who voted last year to do away with two key Social Security claiming strategies labeled their legislative action a “closure of unintended loopholes.” But a majority of senior voters disagree with that description.

In a new poll conducted for The Senior Citizens League, 70% of respondents said the Social Security changes were “unnecessary benefit cuts.”

A year ago, Congress passed the Bipartisan Budget Act of 2015 that authorized changes to Social Security rules. The law eliminated the ability of a worker to file and suspend benefits at full retirement age in order to trigger auxiliary benefits for a spouse while the worker's own retirement benefit continued to grow.

(More: Advisers still baffled by key rule changes to Social Security claiming strategies)

Under new rules that took effect on April 30, 2016, a worker of full retirement age or older can still suspend Social Security benefits in order to earn delayed retirement credits worth 8% per year up until age 70, but no one can collect benefits on the worker's record during the suspension. That means a wife can't collect a spousal benefit until a husband actually claims his retirement benefit.

A second change under the new law phases out the ability of one spouse, or an eligible ex-spouse, to claim only spousal benefits worth half of their mate's or ex's full retirement age benefit amount while their own retirement benefit continues to grow up until age 70.

Now, only those who were born before Jan. 2, 1954, can file a restricted claim for spousal benefits when they turn 66. Younger workers will never have the option of which benefit to choose. If they are entitled to both a retirement benefit and a spousal benefit, they will be paid the higher of the two based on their age at the time of their claim.

“There was little time for the public to learn what was happening to their benefits or to plan alternative action,” The Senior Citizens' League chairman Art Cooper said in a statement announcing the poll results. “With people living longer and spending 30 years or more in retirement, there's growing consensus that Congress should be boosting benefits instead of cutting them.”

In a whitepaper written for the Nationwide Retirement Institute after the bill was signed into law last year, financial planner and Social Security software developer Joe Elsasser explained how the new rules create a tension between competing retirement income goals.

On one hand, if the spouse with the larger Social Security benefit waits until age 70 to claim the largest possible retirement benefit, it will also translate into the largest survivor benefit after the death of the first spouse. But delaying until age 70 to file for Social Security now means the second spouse must wait for the first spouse to actually collect benefits before she or he can receive spousal benefits.

“Prior to [the Bipartisan Budget Act's] April 29, 2016, deadline, this tension could be resolved by using a technique called voluntary suspension,” Mr. Elsasser wrote.

Assume John has a full retirement age benefit amount of $2,000 per month and his wife Mary is not eligible for Social Security benefits on her own earnings record. If John delays claiming his benefits until 70, it would boost the present value of John's lifetime retirement benefits by more than $42,000, assuming he lived until age 85, Mr. Elsasser estimated using Social Security Timing software. But forcing Mary to wait until an additional four years to collect her spousal benefits reduces the lifetime value of her benefits by more than $17,000.

(More: Why Social Security is crucial to women)

“This change to the law was significant because it means that strategies that were once reasonably clear will now have to be weighed with additional considerations,” Mr. Elsasser wrote in his paper, “Social Security Planning After the Bipartisan Budget Act.” “These considerations will be unique to each couple based on their relative benefits amounts and ages.

A separate white paper published by the Spectrum Group, “Social Security: When and Why,” examines the decisions made by affluent investors who have retired and the plans made by affluent investors who are currently working for their own Social Security benefit distributions. A quarter those who have not yet begun taking benefits say they will talk to a financial adviser before making a decision on when to start claiming benefits. The wealthier the investor, the more likely they are to discuss Social Security with their adviser, the paper found.

(More: Low Social Security cost-of-living adjustment keeps Medicare premiums lower for most)

“Many advisers may believe that passage of the [Bipartisan Budget Act] represents the end of Social Security planning as a core component of the retirement income plan,” Mr. Elsasser wrote. “Savvy advisers understand that change always uncovers need.”

(Questions about new Social Security rules? Find the answers in my new ebook.)

Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.

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