Surprise! Social Security is changing

Martin Philpot

If you’ve ever attended a surprise party you know there’s a certain order to it. It typically starts when the door opens and everyone yells “Surprise!” at the unsuspecting honoree. The November budget compromise between Congress and the President put the party elements in reverse order – they yelled “surprise” then closed the door.

The surprise came in the form of new legislation that will “close the door” on some popular Social Security claiming strategies. These changes will provoke dismay from some individuals and a sigh of relief from others. Please keep in mind, this article seeks to simplify a very complex topic. Be sure to explore your options thoroughly.

First things first: People age 70 or older, or those who will be in 2016, will not be impacted by this legislation. Anyone 66 or over, and not yet 70, should reevaluate current claiming strategies before April 30, 2016. Let’s discuss the policy changes that could impact your choices when claiming a Social Security benefit.

Reducing Opportunities for Double Dipping

Congress described the changes to Social Security as “closing unintended loopholes” in order to protect the solvency of the overall Social Security system. The new law will remove a small number of claiming strategies that could have resulted in cumulatively higher benefits for some people under the old law.

Disappearing Claiming Strategies

Filing a restricted application – Under the old law, individuals who had reached full retirement age were given an option to apply for one benefit, and retain the ability to switch to another at a later date. For example, it was possible to claim only a benefit based on your spouse’s earnings and later claim a retirement benefit based on your own earnings. Under the new law you can’t restrict your application to the benefit you want; instead, you must take the highest available benefit. The new rules apply to people who are not 62 by the end of 2015. Individuals 62 and over are “grandfathered” and can still use the old rules when they reach full retirement age.

File and Suspend

You can still file for benefits, suspend taking them and earn delayed retirement credits to get a higher benefit later. But under the new law your spouse will be unable to collect benefits based on your earnings record, while suspending your own benefit. There is a very short window of opportunity – if you have reached full retirement age or will reach it by April 30, 2016, then you can still take advantage of the old rules by filing and suspending your benefits – but you must do so by April 3, 2016.

Lump-sum Reinstatement

Under the old rules, people who chose to file and suspend could later change their mind and retroactively recover the unpaid amounts during suspension. This is no longer possible under the new rules. You can retain your ability to retroactively recover benefits but you must reach full retirement age, file for benefits and suspend them by April 30, 2016.

What Should You Do Now?

If you filed a restricted application or chose to file and suspend before the new law was enacted, you can continue to enjoy the benefits of those claiming strategies under the old rules. Even if you are already receiving benefits, you have an opportunity to re-evaluate whether suspension could benefit you.

The recent budget compromise may have shut the door on some popular claiming strategies, but many other planning opportunities still exist. Knowing your options and correctly claiming benefits could result in tens of thousands of additional dollars over a lifetime. At Wells Fargo Advisors, we have access to robust software that can help analyze many of the Social Security benefit scenarios available.

You might feel appropriate arriving fashionably late to a party, but arrive early to this one – the Social Security Administration is a stickler for punctuality. Being locked out could have significant implications to your retirement lifestyle.

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