Social Security Changes are Afoot

By Kath Suchan, CFP®, CLU®

Introduction
Last month, Congress passed the Bipartisan Budget Act of 2015 that will, for all intents and purposes, eliminate two Social Security claiming strategies – the “restricted application” and the “file-and-suspend.” Below is a brief description of the two strategies.

  • Restricted Application
    Restricted application allows the account holder to apply only for the spousal benefit they would be due under dual entitlement rules. At any age beyond Full Retirement Age (FRA), they can switch and receive benefits based on their own earnings record. By delaying the receipt of benefits on their own record, their benefit will continue to increase through delayed retirement credits at approximately 8% per year up to age 70.
  • File-and-Suspend
    File-and-suspend allows the account holder to file for benefits then immediately suspend receipt of benefits to a future date. This opens the door for their spouse to claim the spousal benefit while the account holder’s benefits continue to increase through delayed retirement credits at approximately 8% per year up to age 70.

A Bit of History
In 2000, Congress passed the Senior Citizens Freedom to Work Act. Part of this law was the creation of “voluntary suspension” of benefits. The intent of “voluntary suspension” was to give those who had reached their full retirement age and were already receiving Social Security benefits the option to suspend receiving benefits and therefore earn delayed retirement credits up to age 70.

Beyond the Intent
Although not its original intent, the “voluntary suspension” rule opened the door for the file-and-suspend claiming strategy described above. Basically, someone smarter than me realized that you don’t have to “already” be receiving benefits but you can file and immediately suspend receipt of your benefit. If you combine that with the restricted application, both spouses can suspend receiving benefits on their own record, thereby allowing both to receive delayed retirement credits, while one spouse receives the “spousal benefit.” This was sometimes referred to as the “claim now, claim more later” strategy.

Two Major Changes Under the New Rules
Under the new rules:

  • Retirees will only be able to claim spousal benefits if their spouse is already collecting Social Security retirement benefits. Therefore, if an account holder suspends their benefit, they suspend all benefits payable to others based on the account holder’s earnings record (e.g. spouse, dependent children, etc.). This closes the door on the file-and-suspend strategy.
  • Retirees will only be able to receive the greater of their own benefit or the spousal benefit they would be due under dual entitlement rules. This closes the door on the restricted application strategy.

On a positive note
It has been estimated by the Center for Retirement Research that the elimination of these two strategies may save the Social Security Administration as much as $9.5 billion per year over the next ten years. Granted, this is not a panacea for the Administration’s woes, but it is a step in the right direction.

Key issues for married couples to consider
These changes do not go into effect immediately. Below are some key issues to consider.

  • If you are already receiving benefits, you will not be impacted at all.
  • For those of you born on or before April 30, 1949, you will have the option to file-and-suspend before the changes take effect on April 30, 2016.
  • For those of you born in 1953 or earlier, you will have the option to file a restricted application and claim the spousal benefit even if the filing does not happen until years from now.

Below is a quick comparison:

for-currently-married

 

Final Thoughts
Just because these two strategies have been eliminated, delaying benefits up to age 70 may still be a sound option. This is true whether you are married or single. Married couples have the added flexibility have having one spouse start sooner or later than the other. There are still several nuances to consider when claiming social security benefits and some decisions are irrevocable. We recommend that you seek professional advice before making any decisions.

 

Social Security Retirement Benefits: The Mini Series

By Kath Suchan, CFP®, CLU®

INTRODUCTION
In my most recent installment of this series, I wrote about a few hard to believe nuances of Social Security benefits. In this final installment, we are going to meet Pat and Val, a married couple with gender-neutral names, and review some simple and more complex Social Security planning strategies available to them. In the following comparisons:

  • Val and Pat are the same age
  • Their “full retirement age” (FRA) is 66
  • Val’s benefit at FRA is $1,000
  • Pat’s benefit at FRA is $450
  • 0% COLA – just to keep it simple

THE SIMPLE
The simple approach is for Pat and Val to file a normal application. They will receive Social Security benefits based on the greater of their own benefit or as much as 50% of their spouses benefit. To the right is a quick visual reminder of how claiming before FRA or delaying up to age 70 can permanently decrease or increase benefits.

Diagram 1, Source Money Guide Pro

Diagram 1, Data Source: Money Guide Pro

THE MORE COMPLEX
Below is a brief description of two strategies that are gaining popularity – “restricted application.” and “file and suspend.” In both strategies, the age and benefits of each spouse relative to the other must be taken into consideration.

  • Restricted Application:
    Restricted application allows the account holder to apply only for the “spousal benefit” they would be due under dual entitlement rules. At any age beyond Full Retirement Age (FRA), they can switch, and receive benefits based on their own work history.
  • File and Suspend
    File and suspend allows one account holder to file for benefits then immediately suspend receipt of benefits to a future date. This allows their spouse to claim spousal benefits while the account holder’s benefits continue to increase through delayed retirement credits at approximately 8% per year up to age 70.
  • Combining the Two Strategies: A Study in Double Dipping
    Diagram 2 illustrates Val and Pat filing for benefits at age 66. Val chooses to “file and suspend” while Pat chooses to file a “restricted application.” As you can see, Val suspends receiving benefits until age 70 allowing his/her $1,000 benefit to grow to $1,320. Pat receives the spousal benefit (50% of Val’s) from age 66 – 69 and then switches to 100% of his/her own benefit that has grown from $450 to $594.
Diagram 2, Source Money Guide Pro

Diagram 2, Source: Money Guide Pro

IN CLOSING
I have used very simple examples to illustrate the planning opportunities for these strategies. The key factors for each couple to consider are the earnings history, ages, and health issues for both spouses. The financial planning software we use along with other Social Security calculators can be useful tools in understanding the various options for your unique situation. Please give us a call if you have questions regarding Social Security benefits and the options available to you.

DISCLOSURE
Although this information was obtained from the Social Security website and other reliable resources, we make no guarantee of its accuracy. We recommend that you seek professional advice to better understand your Social Security benefits and options.

Social Security Retirement Benefits: The Mini-Series

By Kath Suchan, CFP®, CLU®

In my last article, I provided a bit of history regarding the inception of Social Security, some trivia regarding its early days, and a few key definitions. This installment is going to give you an overview of the calculations behind taking benefits early or delaying benefits. Be forewarned, this article is full of acronyms.

What’s Your FRA?
If you remember from the last newsletter, FRA stands for Full Retirement Age and is based on your year of birth. See the chart below to determine your FRA for Social Security retirement benefits only.

Year of Birth

FRA

1943 – 1954

66

1955

66 and 2 months

1956

66 and 4 months

1957

66 and 6 months

1958

66 and 8 months

1959

66 and 10 months

1960 and after

67

Locating Your PIA
Now that you know your FRA, you will need to determine your PIA (Primary Insurance Amount). The PIA is the monthly amount payable at FRA. Prior to 2011, the easiest way to locate your PIA was turn to the second page of your Social Security Statement. The PIA was the first line under “Your Estimated Benefits” (see sample below).

estimated_benifits_f2014

In 2011, the Social Security Administration stopped mailing annual statements, which saves the government millions of dollars annually. Instead, they developed www.ssa.gov/myaccount to provide digital statements. Since very few individuals have set up accounts on this website, the SSA recently began mailing statements to workers on their 5-year milestone birthdays (e.g. 25, 30, 35, 40, etc.) beginning with age 25, with two exceptions to the physical mailings:

  1. You will not receive physical statements if you have set up an account on www.ssa.gov/myaccount.
  2. You will not receive physical statements if you are already receiving Social Security benefits.

OK, now that you know your FRA and PIA, it is time to look at how taking benefits before or after Full Retirement Age can affect your monthly benefit.

Taking Benefits Early
If you begin receiving benefits before FRA, your benefit will have a “reduction factor” applied to the PIA. For those who want to know that math behind the numbers (and you know who you are), the calculation is:

5/9 of 1% for each of the first 36 months before FRA
(which pencils out to about 6.7% per year reduction)

plus

5/12 of 1% for each month in excess of 36
(which pencils out to a 5% per year reduction)

Delaying Benefits
If you choose to delay receiving benefits, you will earn Delayed Retirement Credits (DRCs) for any month from FRA up to age 70. For those born after 1943, the credit amount is 8.0% per year (prorated for months).

Comparing the Benefits
Below is a chart that compares the benefits for various years of birth and beginning ages. To keep it simple, examples do not include future COLAs. The dollar amount illustrated is based on a PIA of $2,000.

YEAR OF BIRTH

Beginning Age Benefit

1943 – 1954

1955

1956

1957

1958

1959

1960 and after

 Age 62 % of PIA 1

75.0%

74.1%

73.3%

72.5%

71.6%

70.8%

70.0%

$ 2

$1,500

$1,482

$1,466

$1,450

$1,432

$1,416

$1,400

 Age 63 % of PIA 1

80.0%

79.1%

78.3%

77.5%

76.6%

75.8%

75.0%

$ 2

$1,600

$1,582

$1,566

$1,550

$1,532

$1,516

$1,500

 Age 64 % of PIA 1

86.6%

85.5%

84.4%

83.3%

82.2%

81.1%

80.0%

 $ 2

$1,732

$1,710

$1,688

$1,666

$1,644

$1,622

$1,600

 Age 65 % of PIA 1

93.3%

92.2%

91.1%

90.0%

88.8%

87.7%

86.6%

 $ 2

$1,866

$1,844

$1,822

$1,800

$1,776

$1,754

$1,732

 Age 66 % of PIA 1

100.0%

98.8%

97.7%

96.6%

95.5%

94.4%

93.3%

 $ 2

$2,000

$1,976

$1,954

$1,932

$1,910

$1,888

$1,866

 Age 67 % of PIA 1

108.0%

106.7%

105.3%

104.0%

102.7%

101.3%

100.0%

 $ 2

$2,160

$2,134

$2,106

$2,080

$2,054

$2,026

$2,000

 Age 68 % of PIA 1

116.0%

114.7%

113.3%

112.0%

110.7%

109.3%

108.0%

 $ 2

$2,320

$2,294

$2,266

$2,240

$2,214

$2,186

$2,160

 Age 69 % of PIA 1

124.0%

122.7%

121.3%

120.0%

118.7%

117.3%

116.0%

 $ 2

$2,480

$2,454

$2,426

$2,400

$2,374

$2,346

$2,320

 Age 70 % of PIA 1

132.0%

130.7%

129.3%

128.0%

126.7%

125.3%

124.0%

 $ 2

$2,640

$2,614

$2,586

$2,560

$2,534

$2,506

$2,480

Age 70 >  

No Change

(1) Rounded to nearest 10th
(2) $ based on a PIA of $2,000. Allow for slight variance due to rounding

Next Installment
The next installment in this series will introduce you to Val and Pat, a married couple with gender-neutral names, and the simple and complex Social Security planning options available to them.

Disclosure
Although this information was obtained from the Social Security website and other reliable resources, we make no guarantee of its accuracy. 

Social Security Retirement Benefits: The Mini-Series

By Kath Suchan

This is the first of a series on Social Security – primarily focusing on the retirement benefits. The goal for this series is to address the key questions asked by our clients. Questions like:

  • When should I begin taking Social Security?
  • What options are available to me?
  • Which options are better for my circumstances?
  • Will my benefits be taxable?

I am going to heed Sgt. Joe Friday’s words and provide “Just the facts, ma’am.” Therefore, I will not be making any left-wing, right-wing, or off-the-chart-wing comments. Nor will I be looking into a crystal ball to predict Social Security’s future.

This first article will lay the foundation for future articles. Its main focus will be on terms, definitions, and history, with a bit of trivia in the mix. Future articles will dig deeper into the options, nuances, and oddities of Social Security retirement benefits.

History

Source of photo: SSA

Source of photo: SSA

The date is August 14, 1935. The U.S. is in the middle of the Great Depression. At 3:30 in the afternoon, President Roosevelt (that’s Franklin D., not Teddy) signed the Social Security Act, giving birth to The Social Security Administration (“SSA”). The following quote is part of President’s Roosevelt’s statement at this historic event:

“We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”

Since its inception, Social Security was intended to be a safety net, not a panacea. If you would like to read the President’s whole statement, visit http://www.ssa.gov/history/fdrstmts.html#signing.

A Bit of Trivia

Taxes to fund Social Security were first collected in January 1937. The tax rate in the original 1935 law was 1% each for both the employer and the employee, on the first $3,000 of earnings. This rate was increased on a regular schedule, so that by 1949 the rate would be 3% each on the first $3,000. The current tax rate for Social Security is 6.2% for each, on the first $117,000 of earnings.

Source of photo: SSA

Source of photo: SSA

The first monthly retirement check, in the amount of $22.54, was issued to Ida May Fuller of Ludlow, Vermont. Miss Fuller was a legal secretary who retired in November of 1939. Therefore, only during the last three years of her employment (January 1937 – November 1939) did she pay Social Security taxes. The total amount she contributed was $24.75. Miss Fuller began collecting benefits in January 1940 at the age of 65. She died in 1975 at the age of 100. During her lifetime she collected $22,889 in Social Security benefits.

Key Terms & Definitions

The terms below are ones that will be used during this series.

SHORT TERM FULL TERM EXPLANATION
COLA Cost of Living Adjustment Social Security benefits may be automatically increased each year to keep pace with increases in the cost-of-living (inflation). History since 2000 (rounded to the nearest 10th of a percent):
2000 = 3.5%     2001 = 2.6%     2002 = 1.4%
2003 = 2.1%     2004 = 2.7%     2005 = 4.1%
2006 = 3.3%     2007 = 2.3%     2008 = 5.8%
2009 = 0.0%     2010 = 0.0%     2011 = 3.6%
2012 = 1.7%     2013 = 1.5%
Annual average since 2000 = 2.5%
FRA Full Retirement Age The age at which a person may first become entitled to full or unreduced benefits based on age. For those born:
Before 1937 = Age 65
From 1938 to 1959 = Age 66+ (2 to 10 months)
After 1960 = Age 67
PIA Primary Insurance Amount The monthly amount payable to a retired worker who begins receiving benefits at full retirement age.

Future Installments

In our next issue, we will compare the three common ages for taking retirement benefits: age 62, FRA (see definition above), and age 70. In future installments, we’ll introduce you to Val and Pat, a married couple with gender-neutral names, and some complex planning options available to them. Lastly, for you Dave Barry fans, we will wrap up the series with “I’m not making this up!” and other Social Security tidbits.