The Social Security Administration issued an emergency message late Friday to its field offices explaining how to implement changes that will ban future retirees from claiming only spousal benefits at full retirement age.
The changes are the result of the Bipartisan Budget Act of 2015 that President Barack Obama signed into law Nov. 2. The ability to file a restricted claim for spousal benefits will disappear for anyone born on or after Jan. 2, 1954.
No surprise there. But financial advisers and their clients are still waiting for the other shoe to drop.
The agency has not yet issued any guidance on another key rule change that will prohibit future retirees from filing for their retirement benefits at full retirement age and then immediately suspending them in order to trigger spousal or dependent benefits for an eligible family member. Under existing file-and-suspend rules, the worker's own retirement benefits continue to grow by 8% per year up until age 70, boosting benefits by up to 32%.
But the Bipartisan Budget Act of 2015 prohibits anyone from collecting Social Security benefits during the suspension period and eliminates the option of requesting a lump sum payout of suspended benefits.
The elimination of the file-and-suspend claiming strategy is expected to take effect around April 30, 2016, but the Social Security Administration has not yet issued any guidance on this change. Anyone who is 66 or older before the deadline would still be able to file and suspend their benefits under existing rules.
The agency's emergency message offered several examples of how the new rule would affect individuals who are eligible for both spousal benefits and retirement benefits on their own earnings record.
Under current law, if a person who is eligible for both types of benefits claims Social Security before full retirement age, they are deemed to file for both benefits at the same time and would be paid the higher of the two amounts. If the spousal benefit is smaller, as in the case of many dual-income couples, it would be wasted and only the higher retirement benefit would be paid.
But under current law, if you wait until full retirement age of 66 to file for Social Security, you can choose to claim only spousal benefits — worth 50% of your mate's full retirement age amount — while your own benefits accrue delayed retirement credits of 8% per year up to age 70. At 70, you would switch to your own larger benefit.
Under the new changes that take effect for anyone born on or after Jan. 2, 1954, the deeming rules will extend beyond full retirement age, meaning if you are entitled to both retirement and spousal benefits, you must claim both at the same time and will be paid the higher of the two amounts.
“If the individual is filing a spouse's claim and is eligible for retirement on his or her own record, take both applications,” the directive said. “Even if the individual is over full retirement age, he or she can no longer restrict the scope of the application if the individual is not age 62 before Jan. 1, 2016.”
There are two exceptions. Someone who is entitled to spousal benefits because they are caring for the worker's child who is under age 16 will not be required to claim both their retirement and spousal benefits. And someone who is entitled to disability benefits will not be forced to claim spousal benefits at the same time.
When applying the new deemed filing rules, the month of entitlement for the filer's claim will be based upon the first month of eligibility for the second benefit, the directive said.
For example, assume Mary and Joe are married. Mary is 62, born on Jan. 2, 1954, and Joe is 63. Mary is eligible for both retirement and spousal benefits. But because of her birth date, she is not allowed to file a restricted claim for spousal benefits.
Mary files for her retirement benefits beginning January 2016. Joe files for his retirement benefits beginning March 2016. Even though Mary is not eligible for spousal benefits in the first month, she is entitled to retirement benefits because her husband has not yet filed. She will be deemed to file for spousal benefits in March as soon as her husband claims his retirement benefits.
Here's another example: Cindy is 64 with a birthdate of Jan. 5, 1952. She is not subject to the new deeming rules because she was born before Jan. 2, 1954. Her husband Mike turns 62 on April 5, 2016.
Cindy began collecting her own retirement benefits in August 2014 at age 62. Mike files for his retirement benefits in May 2016. Although Cindy is eligible for spousal benefits on Mike's earnings record, she does not have to file for them immediately. She can wait until her full retirement age of 66 in 2018 to claim her spousal benefits, which are larger than her own.
Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.