The important news with Social Security is not that benefits are not being adjusted for the cost of living in 2016. Rather, the Bipartisan Budget Act of 1915, signed by President Obama into law on November 2, 2015, involves much more. The significant changes include two Social Security claiming strategies. These provisions are referred to as “file-and-suspend” and “restricted application,” which will be eliminated with this legislation. The changes close what is referred to as “unintended loopholes” that were employed by shrewd retirees and their spouses/ex-spouses to maximize their total payout from Social Security. Yet, they will have a significant impact upon divorce.
There was no public discussion or evaluation of these changes, and no publicly identified authors of these reforms. With the Federal debt approaching $19 trillion, these changes were passed in both the House (266-167) and Senate (64-35) with overwhelming majorities. These recent changes are an attempt to reduce the federal deficit, and avoid a government shut-down. It is anticipated that these changes will save billions of dollars for the government over time. These two Social Security filing strategies used by married couples to enhance their joint filing beneficiary amount will affect divorcees as they are being phased out.
However, if you are presently using one of these claiming strategies, you will still be able to do so. Depending on your age, you may also be able to use the file-and-suspend strategy before the legislation goes into effect on May 2nd, 2016. Survivor benefits will not change. You will still be able to begin collecting widow or widower benefits anytime between the ages of 60 and your Full Retirement Age (66 for most retirees), while allowing your own benefits to accumulate delayed retirement credits until age 70.
Are you too young to take advantage of these strategies? Keep in mind that the most effective way to maximize your benefits – allowing them to grow until you reach age 70 – is an option for those with adequate savings to live on in the first years of retirement.
The previous provisions permitted a retiree to file for Social Security benefits at Full Retirement Age and then immediately suspend the benefits. This may be a clever strategy that allowed a spouse or ex-spouse to begin receiving spousal benefits on the retiree’s earnings of record (generally 50% of the retiree’s benefit), while the spouse or former spouse could delay receipt of their own benefit, plus allowing for an 8% increase in the starting dollar amount per year of their benefit (up to age 70). Under this file-and-suspend strategy, you can qualify for a spousal benefit based upon your record even though it is in suspension (i.e. Social Security is not sending you a monthly check). If your benefit remains suspended from Full Retirement Age until you turn 70, it can be as much as 32% larger. For those who suspend their benefit after April 30, 2016, this strategy will be unavailable. Historically, a spouse or former spouse could receive their spousal benefits (generally 50% of the retiree’s benefit) on a retiree’s earnings history and then switch to his/her own higher benefit amount up to age 70.
Upon a spouse’s death, a widower or widow receives the deceased spouse’s benefit, instead of one’s own, if it is larger.
The option to suspend your benefits and later claim a cumulative lump-sum, or retroactive payment, equal to all of your suspended benefits also ends with these changes. However, you can still un-suspend your benefits and collect retroactive payments if you suspend your benefits before the end of April, 2016.
If you have suspended benefits already, you can receive retroactive payments for up to one day shy of four years. If you do not claim a retroactive payment, you can continue to earn delinquent retirement credits for up to four years.
For those who are younger than 62 or turned 62 on January 2nd of this year, the file-and-restrict option is no longer available. This restriction had permitted an individual who is at least Full Retirement Age to “restrict” or limit the benefit he/she desires to receive to just his/her spousal amount, and delay the start of his/her own benefit. He/she then switches to one’s own benefit at age 70. Now, if you start claiming a spousal benefit, you can’t switch to your own higher benefit at a later date. However, if you were born before January 2, 1954, you can take advantage of this strategy. Even more important whenever you were born, as long as you delay receipt of your own benefit, it will increase by 8% per year from age 66 to 70.
3. Claiming Strategy
Pursuant to the above provisions, the most valuable strategy for Social Security has not been repealed. Every year that a Social Security recipient delays receipt of benefits between Full Retirement Age and age 70, they will receive an 8% increase on the starting dollar amount of their lifetime payments. It is very difficult to replicate a guaranteed 8% rate of return on an investment. At 8% as a return on investment, this strategy is still very important, guaranteed, and is under utilized. Furthermore, anyone who considers taking reduced Social Security benefits starting at age 62 up to Full Retirement Age needs to offset the permanent reduction in their benefit against their current Full Retirement Age benefits.
The final day to file-and-suspend and enable a dependent to receive a benefit based on your record is April 30th, 2016. However, it is not clear as to whether or not both partners have to meet this filing deadline. Also the ability to “suspend” your benefit at Full Retirement Age will still be available after April 30th. However, if someone else – a spouse, child or other parent – is receiving a Social Security benefit based upon your record, their checks will also be suspended, until you begin to collect. This will impact decisions people need to make as to when to claim their benefits. It will also reduce the ability to claim ancillary benefits for spouses, dependent children and others.
Any couples who are currently using either file-and-suspend or file-and-restrict may continue to do so.
5. Divorce Tip
These changes are going to have a serious and immediate impact on anyone who is divorced. As of January 1, 2016 a divorced spouse is no longer eligible for a benefit based upon his/her former spouse, unless and until their former spouse has filed for Social Security.
In 1983 Congress changed the existing law to provide that, assuming a divorced spouse meets the requirements, she/he is eligible for a benefit based upon their former partner’s record, whether or not that individual has started receiving Social Security. This was known as “independent entitlement.” This entitlement of divorced spouses had allowed a divorced spouse, who is age 62 or over, who has been divorced for at least two years, to receive benefits based on the earnings of the former spouse who is eligible for retirement benefits, regardless of whether the former spouse has applied for benefits or has benefits withheld under the earnings test. This is no longer the case. In the family law circles, this is being discussed as a particular detriment to women. Typically women have had lower wages and more time out of the paid workforce, and thus same results in a lower Social Security benefit based upon her earnings. The Social Security Administration has documented this disparity. Thus, if a divorced woman could receive a higher benefit based upon her ex-spouse’s earnings, it can make a big difference in the lifestyle she can afford. In addition, women are more likely to spend their final years alone, given the increasing divorce rate among older couples and a woman’s longer life expectancy. As of January 1, 2016, if an eligible divorced woman (e.g. age 62) was planning to file for Social Security benefits in the near future, she may have to wait until her ex-husband starts to claim benefits, which may be until age 70, before she qualifies for her spousal amount.
Accordingly, it is very important for family law advocates to work with their clients and/or a financial advisor as to these changes, as this can have a significant impact on the cash flow one’s client will have available, and when they plan their filing dates. These changes will significantly impact how spouses in a divorce negotiate for spousal support and how they will anticipate and negotiate future income from Social Security benefits. The parties will have to negotiate trade-offs in Social Security claiming strategies. These trade-offs will have to be compensated for with other assets of the marital estate, as they have associated costs to each party. The terms of each party’s Full Retirement Age and the time for collecting Social Security benefits should be specified in the Judgment of Divorce. Enforcement of these terms will be similar to the enforcement of all other terms of the Judgment. Without such protection, the worker spouse can delay the ex-spouse from receiving benefits by simply not collecting benefits themselves. This is an inequitable situation, especially considering the lingering animosities between some ex-spouses.
Discuss these issues with a family law attorney at Berry Moorman P.C. We protect a client’s assets and future. Also, you may wish to review online advice tools to help you sort out a new claiming strategy. A couple of providers of Social Security claiming software that have posted partial explanations of the changes are Social Security Solutions and My Social Security. As Social “Security” becomes less secure, you need to be informed so that you can make intelligent life decisions.
If you have questions regarding Social Security changes or other family law matters, please contact John Schrot at (248) 645-9680.