Those already collecting Social Security have been able to benefit from two juicy benefits as we describe in our guide “Maximizing Social Security.” But future retirees depending on benefits from Social Security will lose two very profitable options. Both options have permitted married couples to enjoy higher benefits of Social Security based on the earnings record of the highest earning spouse.
Benefits from Social Security - File and Suspend Eliminated
The first benefit of Social Security, the File and Suspend tactic, has allowed a higher-earning spouse to file for Social Security at full retirement age (age 66 for those retiring now). But rather than receiving benefits now, he can delay receipt of benefits until age 70 and earn delayed retirement credits. What are delayed credits? Each year one delays their social security benefits, the payment increases by 8%.
Why file and not receive benefits? Filing for benefits from Social Security today allows the lower-earning spouse to file for spousal benefits now and get a larger check based on the high-earner’s wage record. In other words, both spouses are able to claim benefits against the higher-earner's wage history.
Let’s take an example. Jack has received a good salary over his working career and if he starts benefits today at age 66, he would receive $2,200 per month. Mary, Jack’s wife, has a sporadic earnings history. If she files for benefits under her own earnings record, she would receive $400 per month.
So here’s how they take advantage of a Social Security loophole that will soon disappear. Jack files for Social Security at age 66 but suspends getting any payments until age 70. In the meantime, now that Jack has filed, Mary can also file and claim 50% of Jack's benefit, or $1100 monthly. By taking a spousal benefit rather than her own benefit, she receives $700 more monthly, for life.
At age 70, because Jack has waited, his benefit has increased 8% annually and will be $2904 monthly.
After May 2, 2016, spouses (and other dependents) will no longer be able to collect if the higher earner is not actually receiving benefits. If Jack is not receiving benefits, then no other family member can receive benefits against his earnings record.
Benefits from Social Security - Claim Now, Claim More Later Eliminated
Let’s address the second change. It has been possible for one spouse to claim benefits against the higher earner's record, as we saw above. And then later, switch to their own benefit at age 70. This is the “claim now, claim more later” tactic.
Take the same example above with one change. At age 66, Mary has a choice of taking her own benefit of $900 per month OR taking the spousal benefit of $1100 per month. Mary opts for the $1100 per month. Because she has not taken her own benefit based on her own earnings record, her monthly benefit earns delayed credits and will grow to $1188 at age 70. At that time she can switch to the benefit based on her earnings record and get $1188 per month rather than $1100 based on Jack's earnings record.
People who turn age 62 after December 31 2015 will not be able to use this ability to switch. Instead, at the time Mary files, she gets the higher of the two benefits (in this case $1100) and must stick with it. She cannot switch to a higher benefit based on her earnings record later.
The closure of these tactics takes away the arcane Social Security rules which allowed married couples, qualifying divorcees and widowers to optimize benefits based on the higher-earner's salary history.
Single people never had these opti0ns so they lose nothing due to these changes. Strangely, the biggest losers are those who have divorced and never remarried. Being divorced is the only status where each is able to claim a spousal benefit and then both switch to their own high benefit later (under current rules).
If you will turn age 62 or age 66 in the next few months, you still have the ability to benefit by the tactics described above. After that, the good times are over for married couples and those who have been married.
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