The Bipartisan Budget Act of 2015 makes major changes to Social Security claiming rules related to the Voluntary Suspension of income benefits and the filing of a Restricted Application.
Changes to the Restricted Application
The first change relates to the Restricted Application for spousal benefits. Prior to the new law, an individual who was eligible for both a spousal benefit (based on the work history of a spouse) and a retirement benefit based on his or her own work could choose to take only a spousal benefit at their Full Retirement Age. This allowed the filer’s own benefit to accumulate Delayed Retirement Credits at 8%-per-year and then switch to his own larger benefit at any point in the future (up to and including age 70). This option was carried out by filing a Restricted Application.
The new law phases out the option to file for a Restricted Application. For people born on Jan. 1, 1954 or earlier, the option to file a Restricted Application for only the spousal benefit remains. But if you were born on Jan. 2, 1954 or later, applying for retirement or spousal benefits will automatically trigger entitlement to the other benefit. Also, if someone is not yet eligible for spousal benefits (because his or her spouse had not yet elected) but later becomes eligible for a spousal benefit, entitlement is automatic and occurs on the first day of eligibility. Since the option to file a Restricted Application for only spousal benefits is now only available under the prior law at Full Retirement Age and the rules take effect only for people who are currently under age 62, this option is effectively phased in over a four-year period.
Changes to the Voluntary Suspension
The second change in the law relates to voluntary suspensions. Under current law, a lower-earning spouse is eligible for spousal benefits only after the primary wage earner whose record she is filing under has filed for benefits. Spousal benefits do not earn Delayed Retirement Credits, so delaying a spouse’s benefit past Full Retirement Age represents lost Social Security income with no increase in the benefit amount. A key planning are for couples has always been the understanding that the widow benefit that is available after the death of the first spouse is based on the deceased’s benefit amount, including any 8% increase the deceased would have received due to delaying benefits. The combination of these two rules regularly creates tension between the claiming desires of the spouse and the primary claimant. The spouse wants to receive the highest widow benefit possible, but does not want to forfeit spousal benefits in the short term, since there is no compensatory increase in the spousal benefit for delay. The solution under prior law was for the higher wage earner in the couple to file for benefits, then immediately request those benefits be suspended. The checks to the higher wage earner would stop, allowing the higher wage earner’s benefit to grow by 8% per year, increasing not only the retirement benefit, but also the benefit payable to the spouse upon his death. While the benefit was in suspense, the spouse was able to collect a spouse’s benefit. The new law causes a Voluntary Suspension to stop all benefits payable under the earnings record of the person whose benefit was suspended. In other words, the spouse will not be able to collect a spousal benefit during the time that the wage earner’s benefit is suspended.
The new law also eliminates the ability to request a retroactive lump sum for all benefits between the date of the request and the date of suspension, so the only reason to request a Voluntary Suspension under the new rules will be to accumulate Delayed Retirement Credits. This portion of the law is phased in over a much shorter timeframe. Only people who suspended benefits in the past or within the first 180 days after enactment will fall under the old rules, and will continue to fall under the old rules until they reach age 70 or un-suspend benefits. People who request a suspension after 180 days of enactment will fall under the new rules.
Notably all of these changes concern the interaction between retirement and spousal benefits, and do not include widow benefits. So, widows will continue to have the opportunity to restrict an application to only widow or only retirement benefits and later switch to the other benefit.
The challenge with these new rules is that they effectively create three sets of rules based on a one’s birthday. One set applies for the first 180 days after enactment of the law, another set applies for the next four years, and yet another set applies after four years once the last of the group who still has access to the Restricted Application has passed age 66. In a married couple, each member of the couple could fall under a different set of rules.