Maximize Social Security Benefits . . . Before It’s Too Late

Implementation of new law will impact two strategies that increased lifetime income  

On Nov. 2, 2015, President Obama signed the Bipartisan Budget Act of 2015 into law. This law eliminates two procedures that married couples are able to use to effectively maximize their Social Security benefits: 1) the apply-and-suspend method, and 2) filing a restricted application for benefits method.  

Married couples who haven’t yet used the apply-and-suspend method have until April 29 of this year to take advantage of this strategy. Married individuals who were at least 62 years old on Dec. 31, 2015 (that is, individuals born between 1943 and 1954) may still be able to file a restricted application for benefits when they do reach age 66. Because the clock is ticking, married couples should familiarize themselves with both of these methods or potentially risk losing an opportunity to make the most out of their Social Security benefits.

What Age to Apply?

“An individual born between 1943 and 1954 will reach Full Retirement Age (FRA) at age 66, and can apply for an unreduced benefit at that time. Typically, the longer an individual waits to apply for benefits, the greater the monthly payment will be. For example, a claimant in this age bracket who applies for benefits at age 66 will receive their primary insurance amount (PIA). However, that same individual who applies for benefits as soon as they're eligible (which in this case is age 62) will receive 25 percent less than the PIA and will also forego cost-of-living adjustments (COLAs). Thus, it’s better to wait at least until FRA to apply for benefits.

On the other hand, that same claimant who waits beyond FRA to collect (until age 70, for example) will get an increase in benefits (8 percent for every year they waits, up to a maximum of 32 percent). These increases are known as “delayed retirement credits.” Moreover, benefits will also be increased for COLAs. 

Spousal and Survivor Benefits

If a claimant is married, she can apply for benefits based on her spouse’s (who’s often the primary earner) record. However, for her to be eligible to claim spousal benefits, the primary earner must also file for his own benefits. A claimant who applies for spousal benefits will receive 50 percent of her spouse’s PIA if she waits until FRA to apply. If she applies earlier than her full retirement age, her spousal benefit is reduced. For example, if she applies at age 62, she’d receive 35 percent of her spouse’s PIA. Note that to receive spousal benefits, spouses must have been married for at least one year.

Survivor benefits are also available if one spouse dies. This benefit depends on the age at which a deceased spouse originally claimed his benefits and the age that the surviving spouse claimed the survivor benefits. The maximum available survivor benefit is the same benefit that was paid to the spouse when he was alive. And, the same principles generally hold true: The spouse with the stronger earnings record should delay applying for benefits at least until his full retirement age, or even better, until age 70. For example, if an individual waited until age 70 to collect benefits, his benefit amount will be increased by DRC’s and COLAs. If he passes away at age 71, his surviving spouse (assuming that she is at least FRA) will be eligible to receive the same higher benefit amount that her deceased spouse had been collecting.   

According to James Lange, president of Lange Financial Group, LLC in Pittsburgh, “The concept that the surviving spouse will receive the higher of the two benefits is an extremely important concept to understand. Since the financial goal for most couples is to guarantee the highest income for both spouses’ lives, it’s a good strategy to ensure that at least one of the spouses receives a Social Security benefit that’s as high as possible.” 

Apply-and-Suspend Strategy

This strategy, which will be unavailable after April 29, can make a tremendous difference in the amount of Social Security benefits received over a claimant’s lifetime. Here’s how it works.

When a higher-earning spouse reaches his FRA (age 66), he applies for benefits but immediately suspends them. That is, he directs the Social Security Administration to not send him any checks until he reaches age 70. If he suspends his benefit, the checks that he will receive from the day he turns 70 until he dies will be increased by DRCs (32 percent) and COLAs. But because he applied, his spouse can apply for and receive her spousal benefit (50 percent of her husband’s benefits), even though he is not receiving his own benefit.

In the above scenario, the lower-earning spouse can collect spousal benefits but still delay her own benefits until age 70. This delay will allow the benefit to which she would be entitled based on her own earnings record to grow 32 percent plus COLAs. When she turns 70, she can compare the amount of her spousal benefits to her own benefit and collect the larger amount.

Under the new law, however, a lower-earning spouse will only be able to collect spousal benefits if her spouse is collecting his own benefits. That’s why it’s important to apply and suspend before the April 29 deadline: If a higher earning spouse has already applied and suspended benefits by that deadline, his spouse can collect spousal benefits during the suspension without the higher-earning spouse having to collect his own benefits. 

Note that there’s also a transition period for claimants who haven’t applied and suspended yet. Claimants who will be FRA (66) by April 29 and who apply and suspend by that date will be grandfathered under the old rules. That is, the higher earner’s benefits will earn DRCs and COLAs until they’re collected, and the spouse can collect spousal benefits during the suspension. “Remember,” notes Lange, “this is a short window of opportunity for a limited number of people. But, if apply and suspend is the best strategy for you, and you are eligible, you should take advantage of it and act now!” 

Restricted Application Strategy

Under the new law, the opportunity to file a restricted application will be eliminated in 2020. This strategy involves a claimant applying for benefits, but advising the Social Security Administration that the scope of his application is restricted to receiving only his spousal benefit. This is true even if the spousal benefit is less than the benefit he would receive based on his own earnings record. From the time that he applies for spousal benefits, the claimant’s own benefit will continue to grow by DRCs and COLAs. When the claimant turns 70, he can switch to his own benefit, if his own benefit is higher. Note that a claimant must satisfy certain requirements before filing a restricted application. First, he must be FRA (66) or older. Second, he must specify that he wants only his spousal benefits. Third, his spouse must have filed for her own benefits. 

How does the new law affect restricted applications? A claimant won’t be allowed to choose to receive lesser spousal benefits. Lange notes:

So, if your own benefit is higher, that’s the amount you’ll receive. If you were born before Dec. 31, 1953 (meaning that you were 62 by Dec. 31, 2015), you’ll be allowed to file a restricted application when you reach full retirement age. If you were born after Dec. 31, 1953, like me, you must content yourself with knowing that President Obama and Congress really stuck it to you. You should plan on using other strategies to maximize your Social Security benefits, even if that includes just plain spousal benefits and delayed retirement credits.

Bottom line:  Married couples should reassess their options with the looming April 29, 2016 deadline in place for implementing the apply-and-suspend strategy. And, for those couples who are at least 62 years old on Dec. 31, 2015, evaluate whether filing a restricted application for benefits makes sense. The decision to implement either of these strategies is a personal one, but that decision has to now be made sooner, rather than later.

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