Even small trims to Social Security have a big impact.
Way back in July, just after the June 26 Supreme Court decision in Obergefell v. Hodges that found state bans on same-sex marriage were unconstitutional, several financial advisors touted the potential benefit of the “file and suspend” approach to Social Security for newly married couples. Once both members of a couple reach retirement age, the highest earner can file for benefits and suspend them until age 70, but the lower earner can file for the other's spousal benefit -- which is up to 50% of the highest earner's Social Security benefits.
Within the couple, each member's own benefits would go untouched and continue to grow until age 70, when the lower earner can stop taking the spousal benefit and go for the higher benefit if necessary. At the time, Darla Kashian -- a financial advisor with RBC Wealth Management in Minneapolis who also serves on the board of the Family Equality Council, an advocacy group for gay, lesbian, bisexual, transgender and queer parents and their children -- noted that file-and-suspend was one of the most anticipated benefits on the table.
“I play cards with a group of guys including a very wealthy gay man and we got to talking about file-and-suspend one night and I don't think we've been invited back,” Kashian said in July. “He was so excited about this idea, so he filed and suspended and his husband got half his benefit and he was able to get his full benefit.”
Last month, however, it was announced that the file-and-suspend loophole was being closed after April 30. Griffin Geisler, manager of the Internal Wealth Center at RBC Wealth Management, points out that another Social Security strategy, “restricted application,” is also disappearing.
“This strategy allowed someone who was full retirement age or older and eligible for either a retirement benefit on their own record or a spousal benefit to restrict the scope of their application to only receive the spousal benefits they are entitled to, allowing them to continue earning delayed credits on their own record until they file at age 70,” Geisler says. “For many couples this was 'found money,' as they were both able to delay filing to the maximum age 70 benefit while allowing one of them to receive four years of spousal benefits from age 66 to 70.”
That's no small loss.
According to Gail Buckner, vice president and national planning spokesperson at Franklin Templeton Investments, couples losing the “restricted application” option are losing the ability for one partner to receive a spousal benefit and at the same time, allow their own benefit to increase by 32% or more by age 70.
However, the loss of both of these options stands to significantly affect low- to middle-income couples, who have more to lose since the increased benefit they could have received makes up a large percentage of their relatively smaller joint income from Social Security. Geisler points out that, in many cases, file and suspend was simply used by a spouse with lower -- or no -- income to receive a spousal benefit. For example, a couple consisting of two 65 year olds -- a higher earner has a $2,000 benefit and the lower earner with no job outside the home and no benefit -- would be under considerable pressure.
If that higher earner plans on filing at the latest possible time (age 70) for the maximum benefit -- which would also carry to the spouse after death in the form of survivor benefits -- using file-and-suspend late next year when they are both age 66 would have allowed the non-working spouse to claim a small spousal benefit ($1,000, or half of the primary earner’s benefit). However, since they can't suspend benefits after April 30 without suspending all benefits tied to the primary earner, their whole retirement plan may be in jeopardy.
“Now due to having to change their income plan at short notice (essentially a loss of $12,000 yearly for four years amounting to $48,000) they need to either deplete their retirement accounts early, file for benefits early (reducing their future income by not earning the delayed credits through waiting to file until 70), reduce spending or supplement income from other work,” Geisler says. “[Those are] not ideal options and definitely throws a wrench in their retirement plan without much time to make changes due to the short notice in the changes to the strategy.”
This will affect far more than couples, however. Minor children or disabled adult children still living with their parents, who could have received benefits through the file and suspend strategy, will also be out of luck after April 30. This effectively walks Social Security back to before 2000, when one spouse could only be entitled to a benefit based upon the earnings record of the other spouse if the latter was actually receiving his or her monthly Social Security check.
However, the “restricted application” option remains for folks born on January 1st, 1954 or earlier, and ability for the surviving spouse to receive the higher of the two benefits after one spouse passes away remains intact. Yet that puts a lot more pressure on the higher earner when he or she is considering filing for benefits prior to age 70, which would result in a lower benefit for the surviving spouse.
“Due to the law change, those who do not meet the age requirement and want to retire at the federal retirement age have to decide whether to take 100% of the benefit they earned based upon their own work history, or 50% of what their ex would get at federal retirement age,” Buckner says. “If they want or need more income than this, their only option is to delay starting Social Security and keep working.”
As Geisler points out, Social Security just went from from one set of fairly complex rules to multiple sets of complex rules that interact with each other. It's more complex, but if anything it makes an even stronger argument for delaying the primary earner's benefits until age 70. As he notes, it is hard to beat the 8% increase per year and plus cost of living increases from age 66 to age 70 and is the only way to maximize survivor benefits.
“It may cause one person to make the decision to file earlier, but for the higher earner delaying to age 70 is most often the best decision,” Geisler says. “Although individual situations may vary and you really have to run the numbers in the context of your overall retirement income plan to make the best decision.”
Ultimately, though, it just makes Americans more worried that they'll never see a dime of their Social Security. According to an RBC survey conducted in October, 7% of Americans think they will need to rely on Social Security in their retirement, but only 55% think those benefits will be available when they need them. A Bankrate survey from earlier this year, meanwhile, found that 25% of Americans think they won't have access to Social Security at all.
About 63% of Millennials think Social Security will fund at least some of their retirement several decades from now, and that isn't wrong. Though says the program will cost more than the tax revenue paying for it by 2019 and will run out of reserves in 2033, Social Security will be able to keep paying 77% of all benefits due after that time and 72% of those benefits after 2088. This also assumes that absolutely nothing will be done to bolster Social Security until that time.
That's where we remind you of the two closed loopholes above, and the fact that the retirement age for full benefits shifted from 65 to 67 for those born after 1959 and could easily do so again for future generations just to keep Social Security afloat. In the meantime, those wrestling with the decision to file for full benefits at 70 or for partial benefits as early as 62 aren't in this alone.
”It’s extremely important to work with an experienced financial professional who has access to Social Security software and can show you how the age(s) at which you claim will affect your benefit amount,” Buckner says. “A big part of the decision comes down to: Do you need the money right now? Will you continue to work? Do you have other potential sources of income, such as a 401(k) plan? Does it make send to tap those and allow your SS benefits to grow?“
This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.