Upcoming Changes to US Social Security Collection Options
Buried in the budget legislation approved last week in the US, are a number of changes related to the collection of Social Security Benefits. The legislation includes a provision that prevents people from utilising two popular claiming strategies:
(1) File and Suspend, and
(2) Filing for a Restricted Claim of Spousal Benefits
Both strategies have long been used to increase benefit pay outs for Social Security recipients. Anyone who was relying on these strategies to meet their retirement income needs will need to reassess the impact that the shortfall will have on their retirement planning.
When collecting your Social Security benefit in the US, you have a couple of options. You can choose to collect a full benefit at your Full Retirement Age (FRA), you can delay collection until age 70 and accrue a larger benefit, or you can collect a reduced benefit beginning at age 62. An individual is entitled to collect their own benefit, or 50% of their spouse’s benefit (or ex-spouse if you meet the specified criteria), whichever is larger. These options will not change. However, the loopholes noted above will be closed.
Under File and Suspend, one spouse could file to claim benefits at FRA in order to allow the second spouse to begin collecting their spousal benefit. The first spouse would immediately suspend collection and continue to accrue a higher benefit that would begin at a later date, say at age 70.
The second strategy allowed an individual to begin collecting a spousal benefit, while their own benefit continued to accrue until say age 70. They could then switch to their own Individual higher benefit at a later date.
Under the new rules, individuals will no longer be able to file and suspend. And, individuals will no longer be able to only claim a spousal benefit. When an individual files, they will be deemed to file for both the spousal and individual benefit at the same time and will receive the higher of the two amounts. The individual benefit will not continue to accrue if spousal benefits are claimed at a specific date.
Once the reforms come into effect, no one who turns age 62 in 2016 or later will be able to utilise the claiming strategies. It has been mentioned that the legislation will not affect anyone already collecting benefits through a file and suspend strategy. Married and divorced spouses who are already collecting spousal benefits would still be able to switch to their own larger retirement benefit at age 70. And, requests to file and suspend benefits will likely still be honoured until approximately 1 May, 2016.
As always, should you wish to discuss any of the outlined changes and review whether it directly impacts you, please do not hesitate to contact your MASECO Wealth Manager.
Risk Warnings and Important Information
The above does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any strategy.