Small Change

Some changes are coming to Social Security on 1 May 2016, but they are not major ones that "threaten the financial security" of millions of Americans.


In October 2015, HR 1314, also known as the Bipartisan Budget Act of 2015, was passed by Congress. That legislative bill called for some modifications to the Social Security program which are to take effect on 1 May 2016. As usual some unscrupulous finance-related businesses seized upon those modifications to scare gullible readers into signing up for hefty financial newsletter subscriptions in order to protect themselves from Congress' supposed "hidden radical reform that threatens the financial security of as many as 21.3 million Americans."

In fact, the pending changes are relatively minor: they do not take away any existing benefits or alter core Social Security benefits or payment levels, they are not "hidden" or "radical," and they do not "threaten the financial security" of millions of Americans. The coming changes will alter or eliminate a few strategies used by some people to maximize their Social Security benefits, however, so those in a position to take advantage of them while they still exist need to know how they can be "grandfathered" in.

The first change applies to Social Security's "file and suspend" strategy, which allowed couples to maximize their combined benefits by having one spouse file for Social Security upon reaching full retirement age (currently 66), then immediately suspending the benefits. This allowed the other spouse to claim a spousal benefit while their deferred Social Security grew 8 percent per year until age 70:

The file-and-suspend strategy will no longer work after May 1, 2016. At that time, a person must file for Social Security and actually receive benefits in order for a husband or wife to get a spousal benefit.

However, for those who are at least 66 or who will turn 66 by April 30, 2016, there is still an opportunity to get in under the old file-and-suspend system. Those who do squeak in under the deadline will be grandfathered in under the old file-and-suspend rules.

Another change will eliminate "restricted applications," a mechanism that allows persons who are between full retirement age and age 70 to file an application to claim spousal benefits but defer collecting their own benefits; upon reaching 70, they change from receiving spousal benefits to receiving their own (larger) benefits:

In the future, when a spouse files anytime after age 62, he or she will fall under the "deemed filing" rule, which already applies to people who are not at their full retirement age. "If you're under your full retirement age [and file], Social Security says you are deemed to have taken your own benefit," says Ian Kutner, a certified financial planner with San Diego Wealth Management, explaining the origin of the name.

With the elimination of restricted applications and the introduction of deemed filing for all ages, a spouse can only receive the larger of either their spousal benefit or their own benefit. They can't change their choice either, which means no deferring benefits until age 70 and then switching options for a larger monthly check.

However, those who will turn 62 by the end of the year will be grandfathered in under the old rules for restricted applications.

The last of the pending changes affects suspended benefits, a mechanism that allows persons to file for Social Security but suspend their benefits, then at a later date request payments dating retroactive to their original filing date:

For example, if a man filed for Social Security at age 66 and then suspended his payments, his benefits would grow at a rate of 8 percent per year. However, if the man came down with a life-threatening illness at age 68, he could retroactively unsuspend his benefits. He would lose the 16 percent bump in pay he should have received from deferring payments, but Social Security will send a lump sum payment for the past two years. Future monthly payments would be made at the same rate the man would have received had he started benefits at age 66.

It allowed people to hedge their bets by establishing a filing date for Social Security. They could defer their monthly benefit amount and let it grow but also rest assured they could receive that money retroactively if needed.

Under the new rules, Social Security beneficiaries can no longer retroactively unsuspend benefits. In the example above, if the man needed to start receiving benefits at age 68, he could still unsuspend his filing. He would not receive a lump sum payout for the previous two years, but he would begin to receive his monthly payments at a higher rate, thanks to the deferral.

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