Social Security

What Social Security’s New Rules Really Mean For My Secretary And Others Nearing Retirement – Forbes

Confusion over Social Security is nothing new, but the recent budget deal between Congress and the President takes the confusion and complexity to a new level. Here is an excellent article by Professor Laurence Kotlikoff explaining the changes and their implication. Hint: for many people near applying for benefits, their benefits have been reduced. Many people must act in 180 days. 

Many of you have read my recent column about the 2015 budget deal’s changes to Social Security. Today, I’d like to correct several mistaken views about the law’s fairness and provisions, which have shown up in leading newspapers and websites. I also want to explain why the budget deal may produce […]

Source: What Social Security’s New Rules Really Mean For My Secretary And Others Nearing Retirement – Forbes

Let me turn to some features of the law that people are, it seems, getting wrong or may not yet have spotted.

1) The budget deal gives each of us 180 days from the date of signing (today) to file and suspend our retirement benefit. But you can’t file and suspend until you reach full retirement age, which is now 66. So only those that are within six months of their 66th birthday can still file and suspend. If you were born even one hour too late, too bad.

2) The spouses of those who can and do file and suspend over the next 180 days can collect a full spousal benefit starting at full retirement age if they are 62 before the end of the year. If they were born one day too late, too bad. The spouses who do luck out in turning 62 before Dec. 31, 2015 and who have a spouse who can file and suspend in the next 180 days are grandfathered in not just for 180 days, as many have alleged, but right up to the point they file for their spousal benefit, which can be several years.

3) The budget deal provides a huge incentive, up to $120,000 in some cases, for married couples to get divorced, “live in sin” and then get remarried at 70. Take a couple in which each spouse is now 63. Neither can file and suspend over the next six months because neither will reach full retirement age by then. But if they get divorced, they will be able, at full retirement age, to each collect a full spousal benefit based on each other’s work records while waiting until 70 to collect their own retirement benefit. You need to be divorced for two years before you can collect on an ex, so this couple would have to get divorced by 64 in order to start collecting their full spousal benefit at 66. Can working couples under age 62 do the same? No, because they will be deemed to be filing for their own retirement benefit at full retirement age if they file for their divorcee spousal benefit and will end up with the larger of the two amounts.

4) From these examples, we see that the budget deal has introduced two new types of “notch” babies — those that are a day shy of reaching age 66 in 180 days and those that are a day shy of becoming 62 this year. The difference can mean that two people that were born a day apart can end up receiving, all else equal, benefits that are up to $60,000 different. This strikes me as grossly unfair.

5) The budget deal says that:

In the case of an individual who requests that such benefits be suspended under this subsection, for any month during the period in which the suspension is in effect —
(A) no retroactive benefits (as defined in subsection (j)(4)(B)(iii)) shall be payable to such individual;
(B) no monthly benefit shall be payable to any other individual on the basis of such individual’s wages and self-employment income.

No retroactive benefit means that if you suspend your benefit, you can’t go back to Social Security and ask for a lump sum check equal to all your suspended payments. To see the impact of this, consider someone now age 61, who I’ll call Pam. To keep matters simple, we’ll assume Pam never married. Suppose Pam takes her retirement benefit early at 62, but then suspends it at full retirement age. At 69, Pam discovers she has pancreatic cancer and has at most one years to live. She also has huge medical bills. Under the old law, Pam could receive a check for all her suspended benefits. Now she can’t collect a penny retroactively. This strikes me as grossly unfair.

6) Thanks to provision (B), a nasty ex-spouse can cancel the spousal benefits of his ex by filing and suspending even though doing so provides no advantage to himself. Take Sue who was unhappily married to John for decades before Sue called it quits. John earned a lot of money. Sue earned very little. Sue and John are now both 66. John plans on waiting until 70 to collect his retirement benefit. Sue files for her divorcee spousal benefit. John, who is a nasty person and hates Sue, chooses to file and suspend his retirement benefit, and poof, there, thanks to provision (B) go Sue’s benefits for four long years.

7) Thanks to provision (B), the decision to suspend one’s benefit at full retirement age and wait until 70 to collect a 32 percent higher monthly retirement check — something that everyone should do to better safeguard against extreme longevity — will come at the cost of wiping out the benefits of children and spouses who are collecting on your work record during the period of suspension (which would now be four years between 66 and 70). Take Sam, now 64, who took his retirement benefit at 62 in order to provide a disabled child benefit to his daughter, Alice. If John suspends his retirement benefit between 66 and 70, Alice’s check will stop for four years. I find this incredibly unfair, especially given that Sam’s decision to take his retirement benefit early may have been predicated on being able to suspend between 66 and 70 without affecting the benefit going to Alice.

Contact Social Security if you believe this change affects you.

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6 replies »

  1. My wife and I weren’t planning to use a “loophole” but our plan was squashed because couples where both have earned their own social security were taking benefits on the others record AND also getting credits for waiting. This does sound loopholeish.
    But in our case, my wife didn’t have her own social security because she didn’t work 40 quarters. So our plan was for me to file and suspend when she turned 66 (I would be 66 1/2) so she could receive her spousal benefit (which doesn’t increase past age 66). Then I would start taking my social security at age 70. Mathmatically according to average longevities, this wouldn’t cost the social system a penny more is my understanding. I have two years to decide but after this change I expect to start my social security when she turns 66-1/2.

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    • Interesting, I’m not an expert on this but I’m guessing that somewhere in the Trustees assumptions there is additional cost. Could it be that the spousal benefit jumps to half of your benefit at age 70?

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    • On closer reading it appears the gain for Social Security is that under the new rules the spousal or dependent benefit is automatically suspended to age 70 if the worker suspends where previously the spouse could collect between the file and suspend period.

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      • My wife’s spousal benefit will always be half of my benefit at age 66, my FRA (plus COLA adjustments each year). My understanding is that my social security benefits at 66 are actuarially the same as my benefits at age 70. So in our case there is no difference to the government. The difference to me is that they are “encouraging” me to take my benefits earlier at 66-1/2 when my wife is 66. Very people wait to take their benefits at 70, due to lack of savings and lack of character so the politics of this change was easy for Obama, etal.

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  2. I think you have some of this wrong. Everything I have read about SS benefits of ex-spouse is the ex-spouse has nothing to due with what the person applying for benefit receives. As long as the ex-spouse is 62 or older SS can figure what their benefit would be and base the spousal benefit on that amount. So, I do not believe an ex could not stop a benefit as you say. .

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    • All I can say is that the article is written by one of the top experts on Social Security. So I’m guessing what he has written is correct.

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