Under the new rules, which take effect May 1, if you file and suspend your benefits, no one else can collect on your work record.
The budget deal Congress made the day before Halloween has some scary implications for seniors and retirement savers.
A couple of Social Security claiming strategies, known as file and suspend and restricted application, are being curtailed or killed as part of the two-year budget legislation. The same budget deal also softened, but didn’t eliminate, an increase in Medicare costs for some beneficiaries.
Under the current file-and-suspend strategy, someone who reaches full retirement age (as defined by Social Security) can file for benefits and then suspend receipt of them to continue earning delayed retirement credits up to age 70.
Along the way, if a health crisis pops up that limits life expectancy, the person could retrieve those foregone benefits in a lump sum and begin monthly benefits at the level they would have begun at full retirement age. Meanwhile, at the time of the initial filing, that person’s spouse could begin collecting spousal benefits.
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Under the new rules, which take effect May 1, if you file and suspend your benefits, no one else can collect on your work record. And you can’t get those foregone benefits back if you change your mind and want to restart them.
With the restricted application strategy, people who are at least full retirement age can file to receive either a benefit based on their own work record or for a spousal benefit. Prior to full retirement age, the benefits are blended. Under the new rules, the ability to choose which benefit you want to receive goes away at full retirement age and everyone receives the blended benefit. The rules affect anyone who isn’t 62 by the end of 2015.
If you’re old enough to be grandfathered in, the key retirement-planning point here is to actually consider whether either of these strategies, or both, could help you boost your lifetime Social Security benefits.
Seniors often feel they need to claim benefits right away, but if you can work longer or dip into savings in order to delay, these strategies can boost your lifetime Social Security haul, provided you don’t die relatively young.
Most experts say that only a tiny fraction of beneficiaries take advantage of these strategies. In fact, AARP endorsed the measures in part because so few did.
For the ones who do, however, the take-away is significant, said William Meyer and William Reichenstein, principals of Social Security Solutions, a company that guides people to maximize their benefits. In one example, they found that someone born in 1954 instead of 1953 would lose $62,400 in lifetime benefits due to the changes.
“No one currently receiving benefits was exposed to a benefit cut, and proposals to enact benefit cuts for all 56 million Social Security recipients were rejected,” said David Certner, AARP’s senior legislative-policy director. One such proposal he referred to would have changed the inflation formula for benefits to one that is seen as less favorable to seniors.
If you’re younger than 62, the question to ponder is whether it still will make sense to delay claiming benefits beyond full retirement age. Most experts I spoke with still think it does, but there are caveats. Meyer, for example, said many one-earner couples will now be better off claiming benefits as soon as the nonearning spouse turns full retirement age.
If you delay claiming your own benefit, you can always file immediately if you receive a life-limiting diagnosis, but the safety net of those foregone benefits is no longer there, meaning the whole decision is more of a high-stakes gamble.
And if you’re divorced, watch for possible further clarification of these changes, as some experts believe a “fix” is required in the file-and-suspend language in order for divorced spouses to be able to receive benefits if their former spouse suspends.
Finally, don’t be too quick to celebrate the smaller Medicare premium increase for about 30 percent of beneficiaries affected by the “hold harmless” provision in the program. The provision means the relatively few people on Medicare who are not receiving Social Security benefits have to absorb the entire program’s annual premium increase, which was on track to boost their premiums next year by 52 percent.
“The rule change just spreads out the increase over time, so instead of facing the roughly $50-per-month increase, retirees will face about $20 per month, plus a $3 per month surcharge for about the next decade,” said Michael Kitces, a financial planner and director of research at Pinnacle Advisory Group. “Ultimately the impacted people will still bear the entire cost of the premium increase.”