Buried in President Obama's massive 2015 proposed budget is a major change to Social Security regulations. If enacted, it would eliminate popular Social Security claiming strategies that significantly increase the size of people's benefits.
The administration does not mention the strategies by name, instead, the budget says the change is aimed at preventing “duplicative or excessive benefit payments through a series of targeted reforms.”
Under current rules, for each year past full retirement age (FRA) that you delay the start of Social Security, your benefit increases by 8%. Waiting until age 70 to begin claiming benefits means that your monthly check will be at least 32% higher.
For instance, say Joe’s benefit at age 66 is $1,000 per month. If Joe delays claiming Social Security until he's 67, it will increase by $80 (1,000 x 0.08) to $1,080. If he postpones taking benefits until age 68, his monthly amount goes up another $80 to $1,160. The 8% “bonus” stops once you reach age 70, so there is no upside in waiting longer.
If Joe waits four years beyond FRA to begin receiving his benefit, his monthly check increases from $1,000 per month to $1,320 per month. Plus, this amount would also be increased by any annual cost-of-living adjustments (COLA) Social Security beneficiaries received over this period.
This is a perfectly legitimate claiming option, which is only available once you reach full retirement age. This option was deliberately written into the regulations to encourage and reward those who delay taking their benefit for up to four years.
By combining this strategy with other legitimate claiming choices, married couples are able to boost their joint benefit. Two popular approaches are called “file and suspend” and “file to restrict the scope of your benefit.” The first enables a spouse who is not eligible for a benefit based upon his/her own work record to qualify for a benefit based upon the record of their partner. At the same time, their partner is not forced to file earlier than they need to and accept a lower amount. The latter enables one partner to receive a spousal benefit while delaying the onset of his/her own.
The Obama administration suggests that these strategies are being abused by rich, greedy seniors who really don’t need the money. Its budget proposal claims that the goal is “to eliminate aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.”
The fact is, the only thing these couples are guilty of is abiding by the rules that the government has created.
It is unclear whether the administration can simply order Social Security to make this type of change or whether it would need Congressional approval.
Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.
If you have a question for Gail Buckner and the Your $ Matters column, send them to: email@example.com, along with your name and phone number.