Nov. 11–Congress has pulled the plug on two Social Security loopholes that have played major roles in helping some individuals maximize their total retirement income — a move that may force some people to recalculate their retirement plans.
The filing strategies — the Restricted Application and Voluntary Suspension — are no longer an option for anyone born after Jan. 2, 1954. Individuals born on or before May 1, 1950, who have not filed yet still have until May 2, 2016, to file under the old rules.
Restricted application allowed an individual who was eligible for both a spousal benefit based on the work record of a spouse as well as a retirement benefit based on his or her own work to choose only a spousal benefit at the full retirement age of 66. This allowed that benefit to accumulate at 8 percent per year. Then, that person could switch to a larger benefit at anytime in the future up to age 70.
Under voluntary suspension, one spouse — usually the higher earning spouse — filed for Social Security benefits at age 66 and immediately suspended it. This allowed the other spouse — normally the lower earning partner — to file for a spousal benefit. Meanwhile, the spouse who suspended benefits could allow those benefits to grow by 8 percent annually with delayed benefit credits up to age 70.
Voluntary suspension at age 66 will be phased out 180 days from Nov. 2. Restricted application is now closed for anyone who reaches age 62 after 2015. It is being phased out over the next four years.
The sweeping changes are the result of the bipartisan budget bill signed by President Barack Obama on Nov. 2, changes that are intended to make the government entitlement program more solvent over the long term in light of longer life expectancies.
“We have a client who will turn 66 years old in April next year and then he will restrict his Social Security application to a spousal benefit, allowing his benefit to increase by 8 percent each year,” said Robert Hapanowicz, president of Hapanowicz & Associates, Downtown. “The game plan is at age 70, he will turn on his own Social Security benefit at the much higher rate.
“If you think about it, it’s a pretty good deal,” he said. “The concept is that Social Security benefits grow 8 percent a year. That’s a very good return on investment. In some cases, that benefit can add up to tens of thousands of dollars and potentially $100,000 or more. That’s why Congress is targeting this.”
For example, if a Social Security recipient who is entitled to receive $2,000 a month at the full retirement age of 66 were to allow his benefit to grow at 8 percent before he or she collects it, by age 70 the monthly check would be 32 percent higher — $2,640 a month.
The cost of living adjustments received also would be higher due to the higher monthly benefit.
Casey Gibb, a retirement planning specialist at Hapanowicz & Associates, said anyone who turns 62 this year can still qualify to file a restricted application. Anyone who has already filed for voluntary suspension will be grandfathered in, as well as anyone who implements the strategy over the next 180 days.
“If you [fall below the age limits] and were planning to use one of these strategies in the future, you will need to revisit your financial plan,” Mr. Gibb said. “You will have to come up with a new plan.”
One other strategy available, he said, is to simply delay the start date of receiving Social Security benefits, which has always been a way of maximizing the lifetime payout.
“You are rewarded for delaying your Social Security benefits, just as you are rewarded for saving your own money through interest rates instead of spending it right away,” Mr. Gibb said. “The longer you wait to take your Social Security benefit, the larger your monthly benefit is.”
Tim Grant: email@example.com or 412-263-1591.
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