May 1, 2016 – Changes Coming to Social Security Benefits
Simple Math, Not Scary Consequences
The changes to social security benefits effective May 1, 2016, are scary, or at least that is what most of the internet articles would have you believe. H.R. 1314, The Bipartisan Budget Act of 2015, contained some modifications to benefits. The changes, as portrayed in the media, would have most people concerned with the change, but in the overall scheme of social security benefits, the change merely balances the playing field. Not everyone can wait to take social security benefits until they reach 70. Those who can had two options that worked to their benefit. The "file and suspend" and the "lump sum payout."
Readers may rest assured that existing benefits are safe, the way the benefits are calculated is basically unchanged and the security of that benefit is not being attacked. The act simply changes some strategies a small group of individuals used to increase benefits.
Before we get to those changes we need to first understand the basics of social security. It was not created to be the only income a person has when they retire. As we have moved forward with new retirement vehicles, more and more people have the chance to participate in employer retirement plans and squirrel away money for retirement in other non-employer vehicles. What we save becomes the basis for what our benefits will be on a monthly basis until we die. In addition, we have Social Security paid in by ourselves and then matched by employers.
Example: Kristy started working in 1968 and through today she has worked 44 years out of the 48 available in this time frame. She has attained enough credits to qualify for benefits. When she logs into her social security records (yes, you can do that), she find she paid in $105,000 in social security and $25,000 in Medicare over her career. If she were to retire at age 66 her benefit would be $2,236 an month. Her employer also contributed equal amounts to her social security fund. So the fund’s total is $260,000. But remember, this must cover her for the rest of her life – at least that is what most people think and believe. If she retires in 2016, it would take about 9 ½ + years to use all the money that was paid in on her behalf.
$260,000 divided by $2,236 per month = 116.28 months divided by 12 = 9.68 years
What makes social security work, is that the next generation supports the current generation. So Kristy really only paid for about 4 ½ years of her cost of monthly social security benefits. The rest was paid by the employer and the young who work and continue to support the program.
So when we hear about those scary changes, know that no one is really losing anything. The program is being tweaked and the strategies that are changing only apply to a small select group.
File and Suspend Strategy
This strategy allowed a person to file for their own benefits between their full retirement age (generally 66 for most people now) and 70 and then suspend those benefits and instead claim spousal benefits and not draw on their own benefits until they reach 70. This generates a larger benefit at age 70 as you are able to get about 8% a year added to the social security check. If you will be at least or will turn 66 on April 30, 2016, the opportunity to apply for the “file and suspend” is available, but ends on April 30, 2016.
Starting May, 1 2016, a spouse can only receive the larger of their benefit or their spouses benefit, and no changes can occur once the selection is made. So an individual cannot draw on the spouse and defer their own benefit until they reach 70 and switch.
There’s is some good news for those who are 62 by January 2, 2016. The “file and suspend” is still available (grandfathered) and will be completely phased out in 2023 when the last of those who are eligible will turn 70. But, there is certain criteria that has to be met.
- The spouse must chose “filed and suspended” the benefit before April 30, 2016 or
- The spouse is already receiving a lifetime benefit ages 62-70
No More Lump Sum Payout
Once an individual turns 66 (depending on their birth year, those born in 1960 and later the full retirement age is 67), they become eligible for full benefits. By suspending and not taking the social security benefit at 66 but starting to collect at 70, it was possible to go back and collect those benefits during the four-year span of time that benefits were suspended. They could be collected as an additional amount in each social security distribution or they could take a lump sum for those years.The new law repeals the collection of benefits during the period of suspension and no longer allows the lump sum payout.
Where to I find more information?
You best option is to call Social Security and provide them with the information so they can best advise you on any strategies available before the law takes effect. The number is 800-772-1213.
The Social Security web site at: www.ssa.gov also has an office locater where you could visit with someone in person concerning these issues, https://secure.ssa.gov/ICON/main.jsp. The site provides the address of the local social security office and the times they are open.
As a tax professional, this is a complex change and may have an impact on your client. This article is intended to provide you with general knowledge only. These types of decisions rest best with the agency who is administrating the program, so refer your clients to their local social security office.