File and suspend and restricted application are going away, but there are still strategies you can use to increase your payout, says Social Security's Andrew Salata.
Christine Benz: Hi, I’m Christine Benz for Morningstar.com. Changes are afoot for Social Security. Joining me to discuss the recent changes and what they might mean for retirees' plans is Andrew Salata, he’s a public affairs specialist with the Social Security Administration.
Andrew, thank you so much for being here.
Andrew Salata: You are welcome. It’s always great to discuss Social Security and the changes. Just so everyone can be ready and prepared for it, because that’s what we are all looking forward to in our work careers.
Benz: Right. Let’s discuss some of these changes starting with file and suspend. First, what is that strategy and how has it changed or essentially gotten off the table going forward?
Salata: I guess I’ll start with what our old rules were.
Benz: Right.
Salata: So for those that had already filed and suspended their benefits or have contacted us prior to April 29, they fall under the old rule where if an individual files and suspends at full retirement age, they earn their delayed retirement credits, but we’re also able to pay family members--a spouse or dependent children on the record--while their benefits are suspended.
Benz: So the basic idea was if you are a higher-earning spouse, you file for benefits then suspend and continue maybe working, delaying your eventual filing and receipt of Social Security, but it starts that spousal benefit flowing into the household.
Salata: Correct. Yes, because spousal or family dependent benefits do not get paid out until we--until the actual worker of the record files for retirement. So, for example, if I were at full retirement age and I had a spouse that’s eligible for Social Security benefits as young as 62, once I file I can suspend my benefits so I’ll be able to get delayed credits at 8% per year. This will allow my spouse to start receiving spousal benefits on my record. A spouse at full retirement age gets 50%. So reduced spouse at 62 would get about 37%.
Benz: So unless you initiated file and suspend, unless you had this already in process, this is not going to be available to people going forward.
Salata: Correct. So if you had not contacted us prior to April 30 or you are not 66 as of April 29...
Benz: Of 2016.
Salata: ...of 2016, then you are no longer able to partake, because once you reach your full retirement age that’s when you can file and suspend. And if it’s after our cut-off date the new rules kick in, and the new rule would be for those that are going to plan on file and suspend, because that hasn’t stopped. We'll still--you can still do the file and suspend to get the delayed retirement credits, but the advantages that I discussed are no longer there. If I were to file and suspend after April since, that will be when my full retirement age will be, as long as I’m in suspend status earning my delayed retirement credits, I cannot--none of my dependent spouse or family members would be eligible to receive payments during that time as well. So that’s the big change.
<TRANSCRIPT>
Benz: OK. Let’s discuss the other thing that is going away--this is what’s called restricted application. Let’s discuss what that maneuver is, why people like it, why they like to take advantage of it, and how that will be changing going forward.
Salata: So currently for those individuals that reach full retirement age we have the opportunity to restrict the application. Because all Social Security applications are an application for all benefits. So when you are at your full retirement age we allow an individual to restrict it to just one benefit--for example, a spousal benefit instead of their retirement. So, in effect, if I were to file a restricted application, I’d be saying no to my 100% retirement benefit, but yes to the 50% spousal benefit. An advantage to taking less now is my retirement will now grow at that delayed retirement credit of 8% per year. So that was always open for individuals at full retirement age. If you try to do it prior to full retirement age it was our deemed filing principle where you had to have taken the higher of the two.
Benz: OK.
Salata: So this is in effect for those who have already done it and for anyone that has a birthday prior to January 2 of 1954.
Benz: So, to use an example, let’s say a couple was born, both have birth dates past the deadlines that you have talked about. And so one partner maybe plans to take a spousal benefit first, delay his or her own benefit, take that later on. You say though under this new rule, under the new loophole closure essentially when you go ahead and file for that spousal benefit, they look at whether your own benefit or the spousal benefit is higher and you automatically get bumped into whichever that is, and that may be your own benefit.
Salata: Correct. So if you were born after the cut-off date in January 1 of 1954 and you later wish to restrict your application, because all of Social Security’s applications, in that first paragraph that we never read, it always said I’m filing for all benefits under the Social Security Act. So we no longer allow you to restrict; so in effect, you are filing for all the benefits possible. That means retirement and spousal. So we have to pay you naturally the higher of the two. One thing to just remind everyone is, we’re talking about just retirement and spousal benefit. So if you are eligible as a survivor you can still restrict--not take your own retirement, take a survivor benefit, and then have your delayed credits or earn a higher retirement benefit.
As well as for the file and suspend. If an individual files and suspends after April 29 or as of now and into the future, divorced spouses will still qualify on the record even if the benefits aren’t suspended. So it’s only the current spouse or dependent children in the household that have a suspended benefit, but divorced spouses are still outside of that loophole closure. So that way the fairness part is still there.
Benz: So I guess it’s also an important point of clarification: If you are a single earner none of this has a big impact on you, correct?
Salata: Correct. I mean as a single--or even if you, you and your spouse were kind of wider apart in ages, there was a chance that these options weren’t available to you anyway. I guess the only closure that really would affect a single earner would be the file and suspend, where they cannot change their mind. Then again, not many individuals out there waiting till age 70 are going to change their mind and get their lump-sum money instead of that delayed credits. Because the delayed credits are the reason for that 8% increase (per year).
Benz: So let’s discuss what’s left for people who have not made it under the hurdle to have initiated these strategies, but are maybe looking forward, thinking about Social Security maximization. Is waiting longer really the only thing that’s left on the table for them?
Salata: Correct. I mean aside from the survivor benefit part. It is just taking a look at your benefit statement that you can receive on "my Social Security" account. So going to socialsecurity.gov, creating that account, seeing your online statement. You have those early benefit full retirement at age 70. And then just factoring in that difference. I mean 8% extra per year after full retirement age can create a higher benefit for the rest of an individual’s life compared to say 70% or 75% at age 62. That’s going to be a smaller amount, and looking at our life expectancies in the U.S., we are having now 65-year-olds today, one in three are expected to live past 90, and one in seven are expected to live past 95.
So our retirement career will be another maybe longer 20 or 30 years we need to think about. That’s why using our tools, the online statement, or even our retirement estimator to play with the dates will allow an individual to kind of prepare. See the advantage to waiting longer for that higher amount. Then finding out the affordability of waiting longer--is there other income to take the place of Social Security, until Social Security kicks in? Because we call it retirement but really it has, it’s not connected to when you stop working, just connected to when you file. So an individual can still stop work early but not contact us for Social Security.
Benz: Use other income sources--so certainly the viability of those other income sources that’s an important consideration, too. Does your portfolio, your investment portfolio have longevity it needs in case you’ll be tapping it prior to receiving Social Security.
Salata: Just looking at that whole package, because Social Security was never intended to replace all of your earnings. It was just that part. So where does it end, and how prepared are we for retirement? And that’s why taking a look at what Social Security has early on in the individual's working career can kind of help them plan for the future.
Benz: Right. And another issue to consider certainly would be an individual’s own health history. So certainly waiting longer doesn’t make sense in every case, particularly people who have poor health histories.
Salata: Yes, I mean one of the factors is taking a look at your own health history as well as family longevity, but then also thinking about if you are part of a couple, a married couple because thinking back to the survivor benefit--the survivor benefit is 100% of the deceased's amount. So for example if I were to wait till age 70 and pass away, my surviving spouse would then get those delayed credits if it's higher. So we still have to take a look at maybe health history or my longevity since I may not be as long, but my spouse may live longer, have a longer life expectancy anyway, as well as possibly be able to have that higher amount.
Benz: So you are maximizing the benefit for that partner as well.
Salata: Yes.
Benz: So last question for you, Andrew, and I am sure you get this all the time: solvency of Social Security. I know among peers of mine for example there is a lot of skepticism, trepidation about Social Security benefits whether they will be there in 20 years, 15 years, whatever it might be. What’s the state of the state when it comes to solvency of Social Security?
Salata: What we do have is every year around Mother’s Day our trustees report gets released. And our trustees report will talk about the future solvency and its a actuarial report so it’s on the conservative side. And right now as of the 2015 report, we have solvency till 2034. But that means a lot of times you’ll hear "Social Security bankrupt in 2034." Bankruptcy is not the complete picture because Social Security after 2034 will still have payroll tax dollars. We will have used up our trust fund, our extra money that we’ve been collecting.
So if nothing changes between now and 2034, we still will be able to pay out Social Security benefits, but it will be at a rate of 79% because that’s what our payroll tax dollars will cover. So in effect everyone will receive 79% of their benefit. But again it’s not going away; Social Security has completed 80 years. We had our 80th anniversary just last year. So we are a successful program. We’ve changed throughout the times. And we plan on changing again and what we do like to do is always talk about our solvency, our trustees report gets released, so that way the voting public has an idea of what to expect and can be part of that discussion.
Benz: Right; I know Congress will probably be revisiting various aspects of Social Security over the years. So yeah--I think it’s a dialog. Andy thank you so much for being here. Important changes thanks for being here to clarify them for us.
Salata: You are welcome. I appreciate the time to kind of let everyone know about what to expect and still know the importance of planning for that time when Social Security becomes a part of their life.
Benz: Thanks for watching. I’m Christine Benz for Morningstar.com.
