Understanding Recent Changes to Social Security - Carroll Financial
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November 11, 2015

Understanding Recent Changes to Social Security

You may have seen the recent news that Congress closed some “loopholes” in the Social Security system. Congress was looking for ways to offset the rising costs of Medicare, and as part of the Budget Act of 2015 decided that the Social Security claiming strategy known as “file and suspend” will be eliminated in May of 2016.

If you aren’t familiar with a file and suspend strategy, it works like this. You have a married couple where let’s say the husband has earned higher annual income than his wife.  That means he has contributed more to Social Security over his working life.  The husband files for Social Security benefits at full retirement age, which is currently age 66, and then immediately files to suspend those benefits. 

As a result of this simple maneuver, the wife is now entitled to immediately receive Social Security spousal benefits equal to half of the husband’s full retirement benefits that were just suspended.  She would do this if 50% of the husband’s benefit is higher than she would have received if she had simply claimed her own Social Security payments.

Because he suspended his benefits, the husband can continue working and wait until age 70 to start receiving Social Security checks in his own name.  Why would he do that?  Because each year of deferral allows him to accumulate more credits, effectively raising his monthly benefits 8% per year, which is considerably higher than the inflation rate.  At that time, the wife would stop claiming the husband’s benefits and start receiving her own Social Security checks.  If she was working at the time, she might have raised the amount she could claim under her own name.

The news that this strategy is being eliminated comes on the back of two other pieces of news that may affect retirees:

  1. There will not be a cost of living increase for Social Security in 2016.
  2. Medicare Part B premiums are going up significantly in 2016.

None of this sounds good for retirees. You may have heard us say that the United States can’t fix our budget problems without changing Social Security and Medicare. We suspect that these are just the latest in what will be many changes to these programs in the coming years. Such changes will result in higher costs and lower benefits to retirees and the changes will affect higher income retirees more than those with lower incomes. 

Bottom Line: If you are 62 to 69 and have not yet started to receive your full Social Security benefit, the new rules may affect you. If we have done a Social Security plan for you in the past, we may need to run a new analysis on your Social Security claiming strategy.

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