New Social Security rules trip up widow’s adviser

If she suspends her retirement benefits, she can't collect survivor benefits.

Whenever I conduct Social Security seminars for consumers and financial advisers around the country, I tell audiences that retirement benefits and survivor benefits represent two separate pots of money.

Generally, if you are entitled to both, you can choose to collect one type of benefit first and switch to the other later if it would ultimately result in a larger amount. But that is not always the case.

The new Social Security claiming rules that were authorized by the Bipartisan Budget Act of 2015 can sometimes play havoc with that general advice.

During a recent seminar, a financial adviser asked me if his newly widowed client, who began collecting her own retirement benefits early, could suspend her benefits at 66 and collect survivor benefits on her late husband’s earnings record.

The adviser reasoned that the widow could earn delayed retirement credits of 8% per year between her full retirement age of 66 and age 70 while she collected survivor benefits and later switch back to her maximum retirement benefit.

The short answer is no.

FILE-AND-SUSPEND

The Bipartisan Budget Act eliminated the “file and suspend” claiming strategy after April 30, 2016. Prior to that date, someone who was 66 or older could file for their Social Security retirement benefits and then immediately suspend them.

That action would trigger benefits for a spouse or minor dependent child or permanently disabled child while the worker’s own benefits would continue to grow by 8% per year.

After April 30, 2016, an individual could still voluntarily suspend his or her retirement benefits at age 66 or later in order to earn delayed retirement credits, but could not collect benefits on anyone else’s record during the suspension and no one could collect benefits on their record during the suspension.

(There is an exception for divorced spouses. More on that later).

(More: Pre-retirement earnings can limit Social Security survivor benefits)

The widow in question could switch from her own retirement benefit to a survivor benefit, assuming it was larger than her own, and that would be the amount she would collect the rest of her life, plus any future cost-of-living adjustments.

But if she wanted to suspend her benefits with the intention of growing her retirement benefits while she collects survivor benefits, she is out of luck.

“A worker who requests voluntary suspension of his or her retirement benefit on or after April 30, 2016, cannot collect any benefits (except divorced spouse’s benefits) on another record during the period of voluntary suspension,” Social Security spokeswoman Dorothy Clark confirmed.

TYPICAL EXAMPLE

Here’s an example. Let’s say the woman’s full retirement age benefit was $2,000 per month at age 66 but she claimed Social Security four years early at age 62. Her benefit was reduced by 25% to $1,500 per month. Then she was widowed at age 66, making her eligible for survivor benefits of $1,800 per month.

Survivor benefits are worth 100% of what the deceased worker was collecting or entitled to collect at time of death if the surviving spouse is at least full retirement age. They are worth the maximum amount if claimed at the surviving spouse’s full retirement age. Survivor benefits do not earn delayed retirement credits.

BETTER STRATEGY

The better strategy would be for the widow to switch from her reduced retirement benefit of $1,500 per month to her full survivor benefit of $1,800 per month.

Even though she collected her own retirement benefits early, and those retirement benefits were permanently reduced, she could still collect full survivor benefits because she was at least full retirement age. But if the widow suspended her benefits, she could not collect her survivor benefits during the suspension.

And that just wouldn’t make sense. While it is true her retirement benefits would increase by 32% to $1,980 by age 70, she would not be able to collect any benefits during that period, potentially forfeiting four years’ worth of survivor benefits totaling more than $86,000.

There is an exception to the new file and suspend rules for divorced spouses. A divorced spouse who was married for at least 10 years and is currently single can collect benefits as if he or she is still married. If an ex-spouse suspends his or her benefits, it will not halt benefits to a former spouse.