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Expect Confusion When You Claim Your Social Security Benefits

Confusion reigns at many, if not most, local Social Security offices today. While advice from Social Security agents has always been problematic, things seem to have gotten much worse with the passage of the Bi-Partisan Budget Act last November, which changed two key claiming options.

First, the Act eliminates the file-and-suspend option as of April 29, 2016. This option has allowed one spouse to file for benefits at their full retirement age (currently 66) and then suspend those benefits, permitting them to earn delayed retirement credits of 8 percent per year. This allows the other spouse to claim spousal benefits.

The Act also eliminates the restricted application option for anyone born after 1953. This option has allowed a person to claim spousal (or ex-spousal) benefits at their full retirement age without also claiming their own retirement benefits, thereby letting those benefits grow at 8 percent per year.

These two options are often employed by couples. For example, a husband might file and suspend while the wife files a restricted application for spousal benefits. Combining these options allows both to earn delayed retirement credits up to age 70.

We have recommended these strategies to thousands of clients. Since the changes in the law a surprising number of clients have reported back that their efforts to implement our advice is stymied by an uninformed Social Security agent. All too often, an SSA agent erroneously tells an applicant that our recommendations are not possible.

While we have observed problems in the past, the changes in the claiming rules have clearly added to the confusion. And this confusion is compounded by the failure of the SSA to provide clear  guidance to its agents or to the public as to how it will implement the new rules. (Some guidance has been offered here, but it is far from clear and not comprehensive.)

Here is just one example of the misinformation you might encounter at your local SSA office. A client of ours, Mike, is turning 66 in March; his wife, Jen, is turning 66 in September. He told an SSA agent that he wanted to file and suspend now (before the April 29 deadline) so that his wife could file a restricted application for spousal benefits in September. The SSA agent told him that he could file and suspend only if his wife simultaneously filed for spousal benefits. This claim is completely incorrect.

Anyone (even singles) receiving Social Security retirement benefits can suspend them, provided they have reached their full retirement age. There is no rule that requires a file-and-suspend action to be tied to a spouse’s claiming actions. So, the agent’s statement to our client was groundless, and it could have cost our client tens-of-thousands of dollars. Fortunately for him and his wife, he knew the agent was wrong so he pushed back and asked to speak with a supervisor who did understand the rules.

Here is the bottom line. If you plan to do anything other than the simplest filing for your own retirement benefits, you need to be prepared to educate the SSA agent sitting in front of you. How can you prepare yourself for the chaos you may encounter at your local SSA office?

One thing you can do is read about the file-and-suspend and restricted-application options under the new claiming rules. The SSA website  should be place to start, but it presently contains no information about the new claiming rules.  At a minimum, you can check out the useful information on our main website and elsewhere on this blog.

Second, if you use a financial planner or CPA, you might turn to them for advice. The problem with this approach is that most financial planners and CPA’s do not know much about Social Security claiming rules.

Finally, regardless of how your educate yourself, you need to be prepared to push back if you think you are being misinformed by an SSA agent. If necessary, ask to speak with a supervisor or a “technical expert.” One reliable way to push back is to have copies of the relevant Social Security rules that you can show a poorly trained and confused agent. Helpful information is available here.

The SSA’s (Lack of) Written Guidance Concerning the New Claiming Rules

As of 2/10/16, the SSA has not published full and complete guidance as to how its representatives should implement the new claiming rules.  Some guidance has been provided here, but it is hard to understand and is not comprehensive. [We have also recently received useful information from a Social Security regional office; see below.] As soon as the SSA publishes new claiming regulations, we will post them here. The SSA must publish these new regulations soon, as the first key deadline established by the law is April 29, 2016. So, check back here often.

The new law seems clear, and we have based our software revisions on our reading of that law. However, virtually every law contains ambiguities that administrative regulations must clarify. So, we cannot be 100 percent certain that our reading of the law will be fully consistent with what the SSA ultimately decides about the implementation of the new rules.

The biggest uncertainty, by far, surrounds the interaction between the file and  suspend option and the restricted application option for married couples. To illustrate, suppose a husband is 67 and his wife is 65, turning 66 in July 2016. Just to simplify the discussion, assume that she has no benefits on her own record. He will file and suspend his benefits before April 29, 2016. If she claims spousal  benefits before April 29, we have no doubt that she would receive them even though his benefits had been suspended. But, if she claims spousal benefits, say, when she turns 66 in July, we are not fully confident that she would receive them while his benefits remained in suspension. Our reports that allow for file-and-suspend (free after ordering our basic report) assume that the wife in this example would receive spousal benefits even if she applied after April 29. But, there is some small uncertainty as to whether that assumption is correct.

We emailed this above question to a Social Security contact and received the following helpful email response from the Mid-Atlantic regional office:

“It is important to remember that naming a current spouse on the Number Holder’s Title II [retirement benefits] application who is potentially entitled to spouse’s benefits and appears to meet the factors of entitlement for spouse’s benefits establishes a protective filing for spouse’s benefits and any other Title II benefits he or she may qualify for (See GN 00204.010). Since the husband filed and requested suspension before enactment of the Bi-Partisan Budget Act in 2016 and she is filing in her FRA month, the wife will receive unreduced spouse’s benefits (1/2 husband’s PIA). The husband does not have to request reinstatement of his retirement benefit for his wife to receive benefits on his record.”

That response would seem to resolve the uncertainty surrounding this question related to the interaction between file-and-suspend and the restricted application options. However, the email from the Regional Office also contained the following statement:

“We have not received official guidance from our Headquarters.”

So, we still do not have an official statement from “Headquarters.” But at least we have confirmation from a regional office.

Go here and here for earlier posts that lay out our understanding of the new law.

For the SSA’s summary of the relevant section of the law, see Section 831 here. Note that this summary by the SSA does not clear up the ambiguities mentioned in this post.

Should You File and Suspend before April 29, 2016?

[NOTE: Our software has been updated to reflect the new claiming rules, so reports are now available. Caveat: if you think you still qualify for the file-and-suspend option, you should first order our new custom report and the then contact us for an additional custom report (free) that fully addresses the file and suspend issue.]

If you want to use the file and suspend strategy for getting spousal benefits for your spouse while letting your own benefits continue to grow, you must have filed and suspended by April 29, 2016. If you suspend after that date (even though you may have filed earlier), spousal benefits paid on your record will also be suspended. (Keep in mind that if you file and suspend, that eliminates any opportunity for you to use a restricted application strategy to get “free” spousal benefits.)

There are two circumstances in which you (or your spouse) might want to file and suspend. In either circumstance, the person filing and suspending must be age 66 or older by no later April 29, 2016.

If you fall into this circumstance, and you want our help, you should do the following. Order a married persons report from us for $39.99. Then contact us for further free assistance and an additional free report.

CIRCUMSTANCE 1:

This case involves using file and suspend in order to set up a restricted application strategy for the other spouse.

In this circumstance, the spouse (let’s say the wife) who stands to receive spousal benefits must have been born in 1953 or earlier. She can claim spousal benefits at age 66 while letting her own retirement benefits continue to grow, provided the husband has filed prior to her filing for spousal benefits.  That is, she can use the restricted application strategy.

In order for her to get spousal benefits, he needs to have filed for his own benefits. If he wants ,to file and suspend, then he must meet the following two conditions: 1) he is at least 66 years old by April 29, 2016, and 2) he is not four or more years older than his wife. If he is more than four years older, there is no need to suspend. He will be 70 before his wife can file a restricted application.

CIRCUMSTANCE 2:

This case does not involve a restricted application strategy.  Rather, the file and suspend strategy is used to allow the wife to claim spousal benefits and her own retirement benefits (if any) at the same time. To simplify the discussions, assume the wife has no retirement benefits.

The husband wants to wait until 70 to claim benefits. However, if he is 66 or older by April 29, 2016, he can file and suspend and let his own benefits grow until age 70.

In order to claim spousal benefits, the wife must be at least 62. The husband could file and suspend by April 29 provided he is at least 66 but less than 70. This means that the age gap between the husband and the wife in this example could approach 8 years (versus 4 years in Circumstance 1).  For example, if the husband is 66 in March 2016, he could file and then suspend payments until he reaches age 70 in March 2020. Suppose the wife is 8 years younger, so she turns 62 in March 2020. She could claim spousal benefits for one month while his benefits remained suspended. Of course, if the age gap was less than 8 years, she could receive spousal benefits for up to 4 years while his were under suspension. If the age gap is greater than 8 years, nothing is gained by filing and suspending.

If you fall into this circumstance, and you want our help, you should do the following. Order a married persons report from us for $39.99. Then contact us for further free assistance and an additional free custom report that deals with file and suspend.

Changes in Social Security Claiming Rules: Update for Financial Planners

[NOTE: Our software has been updated to reflect the new claiming rules, so reports are now available.]

Legislation  has worked its way through Congress (as part of the bill to raise the Federal debt ceiling) that would eliminate two claiming strategies used by many seniors: 1) file and suspend, and 2) restricted application. See Section 831 of the bill.

The President signed the bill on 11/2/15, so it is now law. It will go into effect on April 29, 2016 (unless the SSA chooses to extend that deadline).

Based on our reading of this new law, some groups of Social Security claimants will not be affected by these changes, while others will lose all access to these claiming strategies.

I. GROUPS NOT AFFECTED:

1) Single people

2) Widowers

3) Divorcees who were born in 1953 or earlier.

4) Couples who are already pursuing a restricted application claiming strategy.

These are couples where the primary beneficiary has already claimed his/her benefit and the spouse has claimed a spousal benefit. The spouse will still be able to switch to their own benefit at a later date.

5) Couples who are already pursing a file and suspend strategy.

These are couples where the primary beneficiary has already filed and suspended, and the spouse has claimed a spousal benefit. The spouse will still be able to claim their own benefit at a later date. The primary beneficiary will also be able to claim his/her own benefit at a later date.

6) Couples who are planning to pursue a restrictive application strategy and the person who plans to claim a spousal benefit was born in 1953 or earlier.

These are couples where the primary beneficiary plans to claim his/her benefit in the future (or has already claimed a benefit), but the spouse has not yet claimed a spousal benefit. As long as the spouse was born in 1953 or earlier, the spouse will be able to claim a spousal benefit after reaching 66 and then claim their own benefit later.

7) Couples who plan to pursue a file and suspend strategy before April 29, 2016, and the person who plans to claim a spousal benefit was born in 1953 or earlier.

The new law provides a window of 180 days after the law becomes effective where couples can still use the file and claim strategy.

II. GROUPS AFFECTED BY THE CHANGES:

1) Divorcees who were born in 1954 or later

These divorcees will be able to claim either a spousal benefit or their own retirement benefit (whichever is larger), but they will not be able to switch from one to the other at a later time.

2) Couples where the person who was previously planning to claim a spousal benefit first than switch to their own benefit later under a restricted application strategy was born after 1953.

People born after 1953 will not be able to claim one benefit and then switch to another benefit later.

3) Couples who are planning to pursue a file and suspend strategy, but wait more than six months to file and suspend.

The new law allows people to file and suspend for another 180 days after the law goes into effect. If someone waits more than six months, they will not be able to use this strategy. They will be able to pursue a restricted application strategy if the person who claims the spousal benefit was born in 1953 or earlier.

III. SOME RULES-OF-THUMB FOR INTERPRETING PREVIOUS REPORTS

Here are a couples of suggestions, based on our reading of the law) for helping you to determine whether recommendations in previous reports are valid.

1. If a scenario recommends “file and suspend” it is probably not a valid recommendation. Only if the person can sensibly file and suspend no later than April 29, 2016 will this strategy work. (The exact cut-off date is 180 days after the law becomes effective, which appears to be 11/2/15.)

2. If the scenario recommends a “restricted application” (and no file and suspend involved), it is almost surely a valid recommendation if the person was born in 1953 or earlier. If they were born in 1954 or later, a recommendation to file a restricted application would not be valid. Whether this statement also applies to ex-spouses is unclear at present.

 

File-and-Suspend and Restricted Application Strategies Eliminated Soon

[NOTE: Our software has been updated to reflect the new claiming rules, so reports are now available.]

Legislation  that has worked its way through Congress as part of the bill to raise the Federal debt ceiling would eliminate two claiming strategies used by many seniors: 1) file and suspend, and 2) restricted application. See Section 831 of the bill.

The President signed the bill into law on 11/2/15. It will go into effect on April 29, 2016 (unless the SSA chooses to extend this deadline).

In its current form (as of 11/2/15), the law will have the following effects:

File and Suspend

This strategy allows a spouse, who has reached full retirement age, to file for retirement benefits and then suspend them so that they continue to earn delayed retirement credits. The principal purpose for filing and suspending is to allow the other spouse to claim spousal benefits.

Those who are currently using this strategy, and those who employ it by April 29, 2016 are unaffected by the legislation.

Those who file and suspend after about early May 2016 will also have all auxiliary benefits suspended. The principal implication is that suspending one’s retirement benefits will also cause a suspension of spousal or other dependent benefits.

Restricted Application

This strategy is presently employed by people who have reached their full retirement age and their spouse has already claimed a retirement benefit. They can claim a spousal benefit while letting their own retirement benefit continue to grow.

Under the proposed legislation, those born prior to 1954 can continue to use this strategy.

Those born in 1954 or later will not be able to use this strategy. People in this category who claim a spousal benefit, even after they have reached their full retirement age, will be forced to also start their own retirement benefit.

We are monitoring this important development and will use this space to keep you informed.

 

Medicare Premium Alert

A number of forces have converged to create a situation where some Social Security beneficiaries may experience substantial increases in their Medicare insurance premiums.

This past year, in part because of the lower price of gasoline, the measured change in the cost-of-living index (CPI) that is used to adjust Social Security benefits is negative. This means the following will not change next year:

a) Social Security retirement benefits;

b) The maximum taxable income on which Social Security benefits have to be paid;

c) Medicare insurance Part B premiums for the majority of Social Security beneficiaries who        now pay $105/month and have their premiums deducted from their Social Security checks.

Because there is requirement that Medicare cover 25% of expenses from premiums, Medicare recipients who do not fall under the conditions described in (c) above will have to make up the difference to bring the revenues from premiums up to 25%. This means that these other Medicare recipients could experience substantial increases in their Part B premiums. While the numbers have not yet been released, these increases could be around 50%.

Unless there is a change in the law or the Obama administration finds a way around this problem, the following groups will be affected:

A) People who enroll in Medicare in 2016

B) People who pay premiums directly to Medicare. This will include people who have chosen to delay claiming their retirement benefits, but have signed up for Medicare.

C) People who pay higher-income Medicare premiums. These are individuals who have income (MAGI) over $85,000 or married couples with income over $170,000.

While these increases in premiums may last only one year, a new law passed this past spring will increase Medicare premiums in 2018 for higher-income individuals and families. At present, we can only forecast how much these premiums will increase. Projections from the Kaiser Family Foundation can be found here .

We do not recommend changing Social Security claiming strategies based on these possible premium changes. The purpose of this post is to provide an alert to those people who might be affected.

Social Security Benefits for Same-Sex Married Couples

According to a recent post on the AARP website, “…legally married same-sex couples can get spousal benefits only if they live in one of the 13 states (plus Washington, D.C.) that recognizes those marriages. They may also be eligible if they live in a state that recognizes civil unions or domestic partnerships and grants those partners inheritance rights if one of the partners dies without a will.”

The SSA is working with the Justice Department to finalize rules for those living in states that do not recognize same-sex marriage. If the SSA follows the IRS, benefits will be available to same-sex married couples regardless of state of residence. With the government shutdown, promulgation of these new rules will undoubtedly be delayed.

The AARP website states the following:

“Experts advise retired same-sex couples living in non-recognition states to still file for benefits, to establish the date of their request. In states that don’t recognize same-sex marriages, you’ll be denied. But if the law changes, couples could petition for back benefits based on their claiming date.”

We want to add a word of caution here.  A couple should file for benefits now only if they have decided that their best claiming strategy involves one or both spouses claiming as soon as possible. For many couples, delayed claiming may prove profitable. So, careful thought should be given before filing for benefits now. It may be the wrong thing to do.

It is possible to withdraw a claim once it has been approved. But you must do that within 12 months of the start of benefits. Moreover, it is a one-time option. You may want to save that option for the future.

Need help in figuring out your optimal claiming strategy. We can help with our custom reports. Start here.

Social Security’s Windfall Elimination Provision: How to Quickly Calculate Your Penalty

For those of you affected by the Windfall Elimination Provision, finding out how much your Social Security benefits will be reduced is no easy matter. You can ask your local SSA office for help, but it may take you weeks to get an appointment to see a representative. Or, you can use the WEP calculator on the SSA website. However, that calculator requires you to enter your entire Social Security earnings history. Tracking down and entering that information may involve significant time costs for some.

In this post, I offer a quick way to calculate the WEP penalty for those with 20 or fewer years of substantial Social Security earnings. Most people with a government (non-SS) pension probably fall into this category.

Note that the following discussion applies to those turning 62 in 2013. If your year of birth is before or after 1951, the numbers shown below represent for you a close approximation for your WEP penalty.

To determine your WEP penalty, you need to compare three numbers:

  1. 55.6% of your full retirement age benefit (from your SS Statement); this is your tentative WEP penalty;
  2. $396; this is one of two limits on your WEP penalty (it changes with each COLA adjustment); and
  3. 50% of your non-SS government pension; this is the second limit on your WEP penalty.

Once you have these three numbers, pick the smallest one. That is your WEP penalty: that is, the reduction in your full retirement age (FRA) benefit due to your non-SS government pension.

Here are a couple of  examples. Suppose your FRA monthly benefit is $800 and your non-SS pension is $500. The three numbers for finding your WEP penalty are:

  1. $444 (= 55.6% of $800)
  2. $396
  3. $250 (=50% of $500)

So, your WEP penalty is $250, which reduces your FRA SS benefit from $800 to $550.

Next, in the above example let’s change the non–SS pension to $1,000, keeping the FRA benefit at $800. The three critical numbers are:

  1. $444
  2. $396
  3. $500 (=50% of $1,000)

In this example, your WEP penalty is $396, which reduces your FRA benefit from $800 to $404.

This WEP-adjusted FRA benefit is the value you would use if you want to calculate either an early claiming penalty or delayed retirement benefits.

It is also the value you would use if you are requesting a custom report from us to help you get the most out of Social Security.

Further Detail

The following table provides information on the WEP penalty for all of the relevant substantial-earnings years (for those turning 62 in 2013). The row for “20-or-fewer” years of substantial earnings shows the penalty values used in the above examples. (Note that “Limit #1” changes whenever SS benefits get a COLA adjustment.)

Years with Substantial Earnings WEP Penalty Rate WEP  Penalty Limit #1 WEP Penalty Limit #2
20 or fewer 55.6% $396 50% of pension
21 50.0% $356 50% of pension
22 44.4% $316 50% of pension
23 38.9% $277 50% of pension
24 33.3% $237 50% of pension
25 27.8% $198 50% of pension
26 22.2% $158 50% of pension
27 16.7% $119 50% of pension
28 11.1% $79 50% of pension
29 5.6% $40 50% of pension
30 0.0% $0 50% of pension

Here is an additional example of how to use the above table. Assume you have 25 years of substantial earnings. Further, suppose your FRA monthly benefit is $800 and your non-SS pension is $500. The three numbers for finding your WEP penalty are:

  1. $222 (= 27.8% of $800)
  2. $198
  3. $250 (=50% of $500)

So, your WEP penalty is $198, which reduces your FRA SS benefit from $800 to $602.

This WEP-adjusted FRA benefit of $602 is the value you would use if you want to calculate either an early claiming penalty or delayed retirement benefits.

And, again, it is also the value you would use if you are requesting a custom report from us to help you get the most out of Social Security.

 

 

 

Social Security Benefits and the Time Value of Money: An Example

Occasionally, someone asks me for an explanation of the mechanics of discounting future values to get present value equivalents. In this post, I provide an illustration of those mechanics. You can find some additional discussion on our main website.

Suppose that Mary, a single female, is turning 62. She will receive $25,000 a year if she claims at that age. Over a normal life span, up to age 86, she will receive a total of $625,000 (ignoring any COLAs).

A serious problem with this total amount is that it assumes that the $25,000 received 25 years from now has the same value to Mary today as the $25,000 she will get over the next year. Clearly, these two amounts don’t have the same present value: $25,000 25 years from now is worth a lot less than $25,000 received over the next 12 months.

The conventional method for translating future values into present value equivalents is to discount those future values by a discount rate (or discount factor). For our calculations, we use a 3% real discount rate (that is, 3% over and above any inflation).

So, the present value of $25,000 to be received next year would be calculated as: $25,000/1.03 = $24,272. In other words, at a 3% discount rate, $25,000 received next year is worth $24,272 to you today.

From an investment perspective, discounting is the twin of compounding. If you could invest $24,272 today at 3% (above inflation), you would have $25,000 in one year (= $24,272*1.03).

The calculations for the entire 25 year period used in this example are shown below:

Calculating Present Values

The undiscounted annual benefits ($25,000) are shown in the second column. The appropriate discount rate is shown in the third column. And the discounted amounts are shown in the last column.

Our measure of Social Security Wealth is the sum of the last column: $448,389 in this instance. Compare that amount to the undiscounted amount of $625,000. The discounted amount is about two-thirds of the undiscounted amount. (We have found this two-thirds relationship to be a fairly reliable rule of thumb in many instances.)

One useful way to think about the discounted total amount is as follows: $448,389 invested at 3% above inflation will yield a time stream of annual payments of $25,000, for a inflation-adjusted total of $625,000 by year 25.

Now, you may wonder why we use a 3 percent discount rate. That is an issue for a future post.

T Rowe Price Social Security Benefit Calculator: A Broken Tool

T Rowe Price recently rolled out a new Social Security benefit calculator. Unfortunately, their calculator is not ready for prime time. In fact, in its current state, it is not ready for any time. It gives incomplete and misleading advice that, if followed, could cost some married couples $100,000 or more.

I will illustrate some of the problems with the T. Rowe Price (TRP) Social Security calculator with data for a hypothetical married couple, John and Mary. I assume John and Mary were born in 1952 and 1954, respectively. John’s life expectancy is 83; Mary’s is 95. John’s Social Security benefit at his full retirement age (FRA) is $2000 a month, while Mary’s is $100 a month.

Example #1

For this example, I selected the following as this couple’s goal: “We want to maximize the survivor benefit and also receive income early, if possible.” (The TRP calculator allows a user to select among several goals.)

Here is the set of recommendations from the T. Rowe Price calculator:

  1. Mary claims retirement benefits at 62, receiving approximately $900 per year.
  2. When John turns 66, he files a restricted application for spousal benefits, receiving approximately $600 per year.
  3. When John turns 70, he claims his own retirement benefits, receiving approximately $31,680 per year.

And that’s it.

Do you see a problem here–a really big problem?

The T. Rowe Price Social Security calculator has failed to include a recommendation that Mary should claim a spousal supplement as soon as John turns 70. At that point, she could pick up an extra $10,800 a year in spousal benefits. These spousal benefits would continue until John’s expected death at age 83, implying that the T. Rowe Price Social Security calculator has mislaid about $140,000 in this case!

That’s an amazing–really, inexcusable–oversight.

Example #2

For this second example, I assume that Mary’s retirement benefit at her FRA is $900 per month. Other personal characteristics remain unchanged.

For the couple’s goal, I assume that John plans to retire at age 66 and that Mary plans to retire at 70.

Here is what the TRP calculator recommends:

  1. John should file for his retirement benefits at age 66, receiving approximately $24,000 per year.
  2. Mary should file for her retirement benefits at age 70, receiving approximately $14,256 per year.

Again, that’s it.

And, again, I ask: do you see a really big problem here?

The TRP calculator fails to mention that Mary can claim spousal benefits at age 66, using a restricted application and letting her retirement benefits grow until age 70. These spousal benefits would equal $12,000 a year, or $48,000 between age 66 and 70 Mary.

I have not yet thoroughly investigated the TRP calculator. But, from what I have seen, it is easy to conclude that this calculator is seriously broken.

For an example of a calculator that actually works, go here.