UPDATED 2019: This article, originally published in 2016, continues to be one of our most popular posts. Please keep in mind that it is possible some of the facts offered have changed throughout the years. For up-to-date information, go to https://www.ssa.gov/
Social Security Benefit changes came when President Barack Obama signed the federal budget; closing some popular loopholes. However, some items simply carried over, unchanged, from 2015.
This is vital information that you should know, so we hope you find the information on Social Security Benefit changes outlined below to be helpful.
There’s Good News and Bad News
Most people like to take the hard blow first, so we’ll start with the bad news.
3 Social Security filing strategies for maximizing benefits are finally ending. That’s right, what some call the best loopholes in Social Security benefits are now being closed in order to save money and clear the deficit in the government program.
Strategy #1: File-and-Suspend Rule is Ending
The file-and-suspend rule, which was written into Social Security rules in 2000, provides couples the opportunity to coordinate and maximize their Social Security benefits – thereby increasing the total amount of money they receive from the program.
Here’s how it worked – when a spouse reaches full retirement age (presently 66), that individual can file for Social Security (creating a filing date) and quickly suspend their benefits (to be deferred until the a date of their choosing up to age 70 in order to earn an additional 8% per year in benefits).
By filing for Social Security at FRA, this worker’s spouse can then file a spousal benefits claim with Social Security and receive 50% of the dollar value of the working spouse’s benefits, once they reach FRA as well.
You see, one spouse must have an established filing date in order for the other spouse to be eligible to receive spousal benefits.
This benefits couples in two ways
- The spouse (let’s say Jim) who did the file-and-suspension triggers their benefits but ‘suspends,’ or, defers them until age 70 in order to generate the Delayed Retirement Credits of 8% per year – which helps Jim maximize his personal benefits as a person working to age 70.
- By triggering his benefits, his wife (let’s say Sally) now has the option to claim spousal benefits – once she reaches FRA. Sally wants to claim spousal benefits in the case where her personal benefits would amount to less than what she’d receive with the spousal benefit based on Jim’s benefit calculation.
Well, that’s the way it has been. But now, this lucrative loophole is closing.
As of May 1st, 2016, individuals filing for Social Security benefits will no longer be able to voluntarily file-and-suspend their benefits. If you file, you must receive your benefits in order for your spouse to be able to claim spousal benefits.
However, there is silver lining for a lucky few. This good news is that this new ruling features grandfathering provisions for individuals who reach FRA before May 1, 2016 to file-and-suspend and take advantage of the old rules.
If you are planning to take advantage of the file-and-suspend rule in the next 12 months, please contact us here so we can help you work through this new ruling to see if you qualify, and may benefit, from the grandfathering provision.
Strategy #2: Retroactive Lump Sum Payments Ending
This is actually an additional Social Security benefit to the file-and-suspension rule that’s also coming to an end.
When you ‘suspend’ your benefits under the current file-and-suspend rule, you may choose to request payments that will retroactively provide an accrued lump sum payment based on what you’ve deferred since you initially filed for benefits.
For example, if Jim filed and suspended his benefits at age 66, then his benefits would grow 8% a year until age 70. But let’s say he could no longer work and decided to take his benefits at age 68.
Jim could un-suspended his benefits and retroactively generate a lump sum payment for the money he would have been paid for the last two years. Going forward, he would just be paid monthly payments that would amount to what he would have been paid monthly if he had started taking his benefits at age 66.
This strategy has allowed people to hedge their bets. If they are healthy and are able to work until age 70, great; if not, they can pull this retroactive lump sum trigger. However, the new rules close the door to retroactively un-suspending benefits.
Strategy #3: Restricted Application Ending
This rule allows a beneficiary who’s between their full retirement age and 70 to file a restricted application to claim spousal benefits and defer their own benefits until age 70. Note that this is different, though similar, to the file-and-suspend rule.
That means that they can start collecting a check when they hit FRA and switch it out for their own, deferred, bigger check when they hit age 70. Sweet deals, right? Yes they were and they’re coming to a swift end.
The “deemed filing” rule is being extended to age 70, which means that a spouse may only collect the larger of their own, or their spouse’s benefits check. So you can’t defer your own benefits until age 70 and switch from your spouse’s check to your own, bigger check.
Other Social Security Benefit Facts and Minor Changes
No cost-of-living adjustment (payment increase)
Since it’s been determined by the Bureau of Labor Statistics that there was no increase in inflation, which is measured by the Consumer Price Index (CPI-W), there won’t be a 2016 cost-of-living adjustment in Social Security benefits.
Most eligible beneficiaries expect an automatic increase in Social Security and SSI benefits every year; as a provision of the Social Security Act.
However, starting with the 3rd quarter of 2014 to the 3rd quarter of 2015, there was no increase in inflation, so the law dictates that there can be no COLA in 2016.
That means there won’t be any change in the retirement earnings test exempt amounts or the maximum amount of earnings that counts in the Social Security tax.
The “average” worker will continue to receive $1,341 each month while the “average” retired couple who both receive benefits can expect $2,212 each month in 2016.
Medicare Premium Changes
Roughly 70% of Social Security beneficiaries are protected from Medicare Part B premium increases in 2016 thanks to the “hold harmless” rule, which helps beneficiaries avoid lowering their net Social Security benefits.
However, people newly entitled to Part B and higher income beneficiaries may see an increase in premiums.
Tax Rate Maximum Remains the Same
Just as there won’t be a cost-of-living adjustment for 2016, there will also be no changes made to the Social Security tax cap, so earnings below $118,500 will be subject to the Social Security portion of the payroll tax, but not earnings above that amount in 2016.
For employees, this tax rate totaled 7.65% in 2015 and will remain the same in 2016 – 6.20% for Social Security and 1.45% for Medicare.
For the self employed, this tax rate totaled 15.30% in 2015 and will remain the same in 2016.
Social Security Maximum Benefits Fall
Workers who claim their Social Security payments at full retirement age will make $24 less in 2016 than they made in 2015 – adjusting to $2,639 in 2016, down from $2,663 in 2015.
This is due to the unique mix of no COLA (cost-of-living adjustment) and an increase in the national average wage index last year.
Earnings Limitation Remains the Same
The earnings limit for Social Security beneficiaries who work and claim Social Security payments will remain unchanged in 2016 at $15,720 for beneficiaries younger than full retirement age.
If you earn more than this amount and have not reached full retirement age, you will have $1 withheld for every $2 you earn above that cap.
If you hit full retirement age in 2016, you can make up to $41,880, and $1 for every $3 above this cap will be withheld.
However, once you reach full retirement age, no withholdings on income apply and your benefit payments will be re-calculated to account for payments that were withheld and current earnings.
For more information, visit https://www.ssa.gov/