Money Mondays: What You Need To Know About Social Security Changes

Tom: Good morning, Mellody!

Mellody: Good morning, Tom!

Tom: This morning for Money Monday you are going to give us a heads up on some changes that were caused by the recent budget deal which Congress passed and the President signed last month.

Mellody: I am, Tom. While the country happily avoided brinksmanship and another government shutdown when Congress reached a budget deal and the President signed the bill in December, there are three big rules changes that will alter how many couples file for Social Security. After years of advising people to take advantage of some of the filing strategies, I am now here this morning to tell you how the landscape has shifted with the rule changes.

Tom: Wow, adjustments to Social Security filing options. That doesn’t sound good. What is the first one?

Mellody: Well, the biggest change to the rules will end one of the best options for couples to maximize their retirement earnings, an option called file and suspend. Once one spouse reached full retirement age (currently 66), that person could file for Social Security and then immediately suspend their portion of the benefits.

However, this then allowed their husband or wife to claim a spousal benefit while their own deferred Social Security grew 8 percent per year until age 70. This strategy allowed spouses like stay-at-home parents or individuals who had been pushed out of the workforce early to have cash flow while building their Social Security retirement credits, and it is a very common practice. No more. Under the new rule, if a worker suspends their benefit, all benefits will be suspended and this applies to spouses, ex-spouses, and children. This takes effect may 1, 2016.

However, if you or your spouse will reach the age of 66 by April 30, 2016, you are grandfathered in under the new rules, and can still take the file and suspend route. So, if you or your parents or other loved ones are going to turn 66 by that date, you need to ensure that you make sure that this opportunity is seized.

Tom: What are the other rule changes?

Mellody: File and suspend was the big change, but a couple of other strategies will cease on May 1, 2016. The first is the restricted application. This allowed those who are between their full retirement age and 70 to file a restricted application to claim spousal benefits, but defer their own benefits until age 70. Once they hit 70, they can change from receiving spousal benefits to their own, greater benefits.

After april 30, when a spouse files anytime after age 62, he or she will fall under the “deemed filing” rule, which already applies to people who are not at their full retirement age. Now Social Security will determine whenever you file, you are taking advantage of your own benefits. With the elimination of restricted applications and the introduction of deemed filing for all ages, a spouse can only receive the larger of either their spousal benefit or their own benefit.

Again though, those who will turn 62 by the end of the year will be grandfathered in under the old rules for restricted applications, so if this is you or someone you know, make sure they take advantage of this if it applies to them.

Mellody: It is another filing change that you have to know about, though it generally affects fewer people, and it deals with suspended benefits. Currently, if you were to file for Social Security at age 66 and then suspended your payments, your benefits would grow at a rate of 8 percent per year. However, if suddenly you had a financial emergency or an illness at 68, you could retroactively un-suspend your benefits. In doing this, you would lose the 16 percent increase you would have received from deferring payments, but Social Security would send a lump sum payment for the past two years, and future monthly payments would be made at the rate you would have received at 66.

Under the new rules, Social Security beneficiaries can no longer retroactively un-suspend benefits and get a lump sum. Instead, in the example above, if you needed to start receiving benefits at age 68, you could still un-suspend your filing, but you would just begin to receive his monthly payments at a higher rate, thanks to the deferral.

Tom: These are significant changes that could really impact people. Why did Congress make these changes, and what should we do to adjust?

Mellody: These changes are certainly going to have a significant impact on many people who were counting on these strategies for their retirement, especially because the changes are taking effect so rapidly. In terms of why they were made, most people believe they are geared toward saving money and closing perceived loopholes in the Social Security program.

As for what to do to adjust to these changes, the best thing you can do is put more money into your 401(k) in order to build up your own retirement funds outside of the Social Security system. You also should know that your benefits will be calculated based on your past earnings, so asking for a pay raise or moving to a higher-paying job will also help. One of the most important pieces of any puzzle is awareness, so I hope sharing these changes with our audience today ensures that more people know these changes are coming and are prepared.

Tom: Absolutely. Thanks for keeping us informed, Mellody!

Mellody: Happy to help, Tom!

 Mellody is president of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News and CBS.com.

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