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Important Changes Coming To Social Security

Last week Congress passed a two-year budget deal that includes important provisions designed to close perceived 'loopholes' in the Social Security system. The idea is that these strategies/loopholes were generally adopted by married high-income beneficiaries and by closing the loopholes the system would be made more solvent. Here is a summary of the two strategies and the changes being made to eliminate them.

The first strategy is the 'file and suspend' strategy. Here is how this strategy works: let's say the husband reaches age 66 (full retirement age) and files for benefits but immediately suspends his benefits. By delaying receipt of his own benefits until age 70 he is able to receive delayed retirement credits of approximately 8% per year until age 70 and thus dramatically improve his benefit when does actually start at age 70. By doing the initial filing at age 66 though, his wife can now file for spousal benefits based on her husband's record. She would only do this if the spousal benefit is greater than her own benefit.

This strategy is effectively being eliminated 6 months after the legislation is signed by the President which is expected this week. In our experience we have not recommended this strategy too often as many of our married couples both have a work history. This strategy works well when one spouse has little to no work history.

The second strategy being eliminated is the one we recommend more frequently and it is known as the restricted application strategy. It is also been referred to the 'collect some now, collect even more later' strategy. Here is an example of how this might work. Let's say both husband and wife have similar earnings records and they are both 66 years old. At age 66 the wife applies for her own benefit. The husband though wants to delay his benefit until age 70. At age 66 he can apply for a spousal benefit on his wife's record by restricting his application to just the spousal benefit and allow his own benefit to continue to accrue delayed retirement credits. For two-earner couples this could result in up to an additional $15,000 per year of benefits or $60,000 of benefits over 4 years!

This strategy is being eliminated for anyone who is not yet age 62 by the end of 2015. So, for anyone who is at least 62 by Dec. 31, 2015 and planning on using this strategy, it appears you are in luck.

There has been a lot of talk about reforming Social Security and this is most likely just the beginning. Since these strategies were not used by most beneficiaries it will most likely be a non-event for most folks. The good news is that Social Security claiming strategies will be a bit easier in the future.

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