Bipartisan Budget Act of 2015 Impacts to Social Security Filing Strategies
When the Bipartisan Budget Act of 2015 becomes law, it will change Social Security’s deeming rules. Currently, if a retiree files for Social Security benefits before reaching their Full Retirement Age (FRA), they are deemed to have filed two applications – one on their own Earnings Record and the second on their spouse’s Earnings Record. They will receive the higher of their own Retirement benefit or ½ of their spouse’s benefit (note that standard benefit reduction applies if you file before FRA). If you wait until your FRA, deeming rules no longer apply. You have a choice whether to receive spousal benefits or your own Retirement benefit. This is referred to as filing a restricted application. The beauty of this is that you can receive spousal benefits while delaying your own Retirement benefit in order to increase it by earning Delayed Retirement Credits (DRC) which accrue at the rate of 8% per year.
Under the new law, this choice goes away. Deeming rules will apply until you file regardless of your age at the time of filing. In terms of deeming, it doesn’t matter if you file at 63 or 68. In both cases you will be deemed to be filing for both spousal benefits and your own Retirement benefit. If your benefit is greater than ½ of your spouses, then you will receive benefits on your own earning record. If it is less than ½ of your spouses, then you will collect spousal benefits and will not be able to file a future separate claim on your record (because you have been deemed to have done so already.) This change will affect thousands of beneficiaries.
Another change coming with this act is the elimination of a popular file and suspend strategy that works like this. One spouse files for retirement benefits and immediately suspends them. This enables the other spouse to collect spousal benefits while the first spouse’s benefits earn DRCs.
However, there is a grace period before these changes go into effect. Once the bill goes into law, people who turn 62 before January 1, 2016, can still file a restricted application for spousal benefits as they reach their FRA over the next 4 years. Also, if you suspend within 180 days from when the bill is signed into law, you are grandfathered in, i.e. this file and suspend strategy is still available to you.
Is there a silver lining to these changes? That depends on your perspective. An argument can be made that the current deeming and file and suspend strategies make it difficult to decide when to file for Social Security. The new law will simplify the decision as to when to file and will likely result in more people filing for benefits sooner rather than waiting. On a macro level, this change can be viewed as closing a loophole in the Citizens Freedom to Work Act of 2000, serve as an example of bipartisanship and improve the health of the Social Security Trust Fund. However, if you’re retirement plan included one of these strategies, it is likely that your retirement plan will suffer.