The Bipartisan Budget Act of 2015 (BBA), Pub. L. No. 114-74, signed by President Obama on November 2, 2015, created a sea change in Social Security analysis and planning. The authors’ article, Social Security Retirement Benefit Options, in the November/December 2015 issue of Probate & Property, described pre-BBA Social Security claiming options. Except for limited grandfathering, most options are no longer available. This article summarizes the changes, who can still benefit from the strategies described in our previous article, and why Social Security planning is still an important part of retirement and estate planning for all clients.
The inclusion of any changes to Social Security claiming options in the BBA was a surprise to almost everyone. Mary Beth Franklin, a Social Security expert and retirement planning columnist for Investment News, stated that she was shocked when she heard about the proposed changes. A former Capitol Hill reporter, she learned that the changes were the price extracted by the White House and congressional leadership for including provisions that addressed a Medicare premium increase faced by some Medicare recipients and preventing the Social Security Disability Income Trust Fund from running out of money in 2016.
Medicare premiums for 2016 were scheduled to jump by approximately 52% for the approximately 30% of Medicare beneficiaries who are not protected from an increase in Medicare premiums that exceeds the Social Security cost of living adjustment. The Social Security Disability Income Trust Fund was projected to run out of money to pay benefits in 2016. Previous shortfalls in that fund had been resolved by temporarily transferring money from the Social Security Retirement Trust Fund to the Disability Trust Fund, but this solution was being blocked by some in Congress who wanted other changes to the Social Security Disability Income program.
The President’s fiscal year 2015 and 2016 budgets proposed eliminating “aggressive [Social Security Administration] claiming strategies,” which the budgets stated were used primarily by those with higher incomes. These proposals were aimed at the file-and-suspend and file-and-restrict strategies discussed in our previous article. The 2016 Social Security Administration budget justified this proposal as a way to eliminate the opportunities to “manipulate” the file-and-suspend and file-and-restrict claiming options to maximize Delayed Retirement Credits (DRCs), “result[ing] in equitable treatment of all individuals, regardless of income.” SSA FY 2016 Budget Justification, www.ssa.gov/budget/FY16Files/2016FCJ.pdf. Before enactment of the BBA, no legislation to make these changes was introduced nor were any public hearings of any kind held on the proposal.
The Social Security Administration Chief Actuary stated these changes are expected to have “essentially no cost effect through 2025, with cost reductions increasing thereafter.” The changes will reduce the long-range Social Security deficit by 0.02% of taxable payroll. Letter from Stephen C. Goss, Social Security Chief Actuary, to Speaker John Boehner, October 27, 2015.
Section 831 of the BBA made two major changes to Social Security claiming options. First, if a worker suspends his or her Social Security benefits, the benefits of all persons receiving Social Security benefits based on the worker’s record also are suspended. This change is effective for benefit suspension requests made at least 180 days after the November 2, 2015, BBA effective date. Social Security has announced that the deadline is April 29, 2016. After that date, a worker cannot file and suspend to allow his spouse to claim spousal benefits while earning DRCs on the worker’s own benefit.
Second, an individual who is at least full retirement age (FRA) can no longer restrict his Social Security application to only spousal benefits. Filing for Social Security benefits will result in Social Security paying the maximum benefit that the individual is entitled to receive, based on the individual’s own record and any spousal benefits the individual is entitled to receive. Individuals who file for Social Security benefits before FRA are currently subject to this rule. Survivor benefits are not considered in making this determination. A limited grandfathering provision allows individuals who are age 62 on or before December 31, 2015, to file and restrict his benefits to only spousal benefits after reaching FRA.
In addition, the BBA prevents an individual who files and suspends after April 29, 2016, from requesting a retroactive payment of the suspended Social Security benefits.
The good news for current Social Security beneficiaries is that none of the BBA changes is retroactive. These changes effectively divide individuals into four classes for Social Security purposes:
Individuals who do not qualify for Class I are divided into Class II, III, or IV, based on their ages. Because Social Security considers an individual to reach his next age on the day before his birthday, individuals born on April 30, 1950, are considered age 66 on April 29, 2016, and those born on January 1, 1954, are considered age 62 on December 31, 2015.
Individuals who have already filed for Social Security are not affected by the BBA changes, regardless of what filing strategy they used. These include individuals who filed and suspended or filed and restricted. Similarly, those Social Security recipients who are receiving benefits based on a worker who filed and suspended are not affected by the BBA changes.
Surviving spouses still have the same options they had before the BBA. They may file for survivor benefits as early as age 60 (age 50 if disabled) and later file for their own benefits or file for their own benefits as early as age 62 and later file for their survivor benefits. For a surviving spouse, it remains important to compare benefits available as a surviving spouse and benefits based on the spouse’s own record.
Individuals fall into Class II if they were age 66 by April 29, 2016. These individuals could have filed and suspended their Social Security benefits by April 29, 2016. Doing so would allow a spouse and qualifying children and parents to receive benefits on the worker’s record. Once the benefits have been suspended, the individual can reinstate his benefits at any time to receive either a lump sum payment of the suspended benefits or benefits that include the DRCs earned through the date benefits are reinstated. A worker who did not take action by April 29, 2016, cannot now file and suspend his benefits to allow family members to receive benefits while the worker earns DRCs.
Individuals in Class II provided themselves with the most flexibility if they filed and suspended before the April 29, 2016, deadline. If they decide to start receiving Social Security at a later date, they can either request retroactive payment of the suspended benefits or begin to receive benefits with the DRCs earned to that time.
Individuals who reached age 62 by December 31, 2015, can file and restrict their benefits to spousal benefits when they reach their FRA of age 66. Receipt of spousal benefits requires that the worker spouse must either be receiving benefits or have filed and suspended before April 29, 2016. If not, the spouse must wait until the worker files for Social Security benefits to receive spousal benefits.
Workers under age 62 will see the most effect from the BBA on their Social Security filing strategies. They cannot file and suspend or file and restrict. This limits the decision to when to claim their own benefits.
The combination of the 25% to 30% benefit reduction for filing before FRA and the 8% annual DRCs can produce a significant difference in Social Security benefits on a worker’s own record. For a worker whose FRA is age 66 (those born before 1955), claiming benefits at age 62 reduces Social Security benefits by 25% compared to claiming benefits at 66. Waiting until age 70 provides four years of 8% DRCs for an effective 76% increase in benefits over the benefits received at age 62.
A worker born in 1960 or later has a FRA of age 67. Filing for benefits at age 62 produces a 30% reduction in benefits compared to waiting until age 67. Waiting until age 70 provides three years of 8% DRCs and more than a 77% effective increase in benefits.
Planning for Class IV individuals also should consider the effect on survivor benefits. The survivor receives the greater of his own benefit or an amount equal to the deceased spouse’s benefit. This means that the death of one spouse reduces a couple’s Social Security benefits by the smaller Social Security benefit. Delaying Social Security benefits can significantly increase the survivor’s Social Security benefits.
Some individuals may find filing for benefits before FRA is beneficial. This commonly occurs when a worker has a spouse, dependent children, or parents and wants them to receive benefits on the worker’s record. The worker can file for benefits on reaching age 62, entitling family members to receive benefits. The benefits will be limited to 150%–180% of the worker’s FRA benefit and subject to the earnings test, based on the worker’s earnings. When the worker reaches FRA, if the family members no longer qualify for benefits, the worker can suspend his benefits and earn DRCs. For a worker who filed at age 62 and took a 25% reduction, suspending at age 66 and earning DRCs of 8% annually for four years will produce a benefit at age 70 that is 99% of the benefit he was entitled to receive at age 66. Even for workers whose FRA is after age 66, this strategy will produce a larger benefit than continuing to receive Social Security benefits between FRA and age 70 once family members no longer qualify for benefits.
The Social Security Administration has stated that a worker who suspends his benefits will not affect the benefits received by an ex-spouse. A divorced spouse must have been married for at least 10 years and unmarried to qualify for benefits on an ex-spouse’s record. An ex-spouse who has been divorced for at least two years can receive spousal benefits on the former spouse’s earnings record, regardless of whether the former spouse had filed for benefits. If a former spouse suspends her benefits after April 29, 2016, it will not affect a divorced spouse’s benefits.
The Social Security changes included in the Bipartisan Budget Act of 2015 change the Social Security planning landscape for those in Classes II through IV but do not mean that Social Security planning is obsolete. Making the appropriate decision still requires a careful evaluation of the options available. While everyone has choices on when to file, the classes differ on whether there is any additional flexibility. People in Class II who filed for Social Security benefits by April 29, 2016, preserved significant additional flexibility. An individual in Class III has some additional flexibility after attaining age 66 if his spouse has filed for her own benefits. Those in Class IV no longer have any additional flexibility and are limited to deciding when each spouse should file for his or her own benefits. Overall, the BBA changes mean that people in Classes III and IV will generally need to wait to claim Social Security benefits until as close to age 70 as possible to maximize their benefits.
