Missing benefits
January 6, 2016 | by Chris Stein, CFP®, Finance Instructor at Colorado State University
New Social Security Changes Cost Middle Class Couple $21000

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Again this week we have evidence of the negative effects of the new Social Security Changes.  The proponents of these changes argue that they were closing “loopholes” only used by “rich people”.  Once again, we see evidence this is not a fair characterization, and as described in previous blog posts, the harm is being done to a female who was part of a two earner household.  The following is a close representation of a real situation faced by a couple, whose names I will protect by referring to them as George and Georgette.

Depending on Social Security

George and Georgette are both over the age of 62 now so they are “grandfathered” in to the old rules on filing a “Restricted Application”.  Neither of them is their full retirement age yet (66) and will not reach that age until after April 30, 2016 so neither will be able to use the old rules on “suspending benefits”.  See posts on this blog during the months of November and December, 2015 for details on these changes.  George will turn 66 in about a year, but Georgette is almost exactly 2 years younger so is still 3 years from full retirement age.  This couple both worked in jobs where they paid into Social Security, but George has a higher retirement benefit since Georgette took time off work to raise children and she generally worked lower paying jobs than George.  This couple does not have a large nest egg so they were relying heavily on dependable retirement income, like what they would receive from Social Security.  In planning their retirement they wanted to try to cover their “fixed” expenses with reliable income so that their basic needs were not subject to the success or failure of some investment account.  In order to achieve this it became evident that they would both need to delay filing for retirement benefits until age 70 in order to maximize the monthly amount.  This would mean they would need to continue working a bit part time into their late 60s and use some of their savings to live on.  Since interest rates have been so low, pursuing this strategy of delaying Social Security had the bigger payoff compared to other options they were willing to consider.

Social Security Changes

Under the old rules George was planning to “file and suspend” at his age 68 in order to allow Georgette to claim a spousal benefit at her age 66.  By waiting to Georgette’s age 66 she would be able to file a “restricted application” for just a spousal benefit and allow her own benefit to continue to grow until age 70 when she would switch to that larger benefit.  This technique maximized the couple’s post age 70 SS income, while providing some income from Georgette’s spousal benefit.  With the new rule changes Georgette cannot now do this.  Even though she has been “grandfathered” in to the ability to file a “restricted application” at age 66, George CANNOT suspend his benefit anymore and still have Georgette collect her spousal benefit.  Effectively Georgette will have to wait until she reaches 68 when George will be 70.  At that time she will be allowed to collect a spousal benefit because George will be collecting since there is no benefit for George to delay past age 70.  Now let’s look at the numbers:

Approximate Benefits Earned Age 66 Benefit Age 70 Benefit
George $1800 $2400
Georgette $1300 $1700

 

Comparison of claiming under old vs. new rules

George Age Georgette Age Old Rules New Rules
66 64 No Benefits Collected No Benefits Collected
68 66 Georgette $900/mo No Benefits Collected
70 68 Georgette $900/mo George $2400/mo
72+ 70+ Georgette $1700/mo George $2400/mo

Losing Benefits

So as you can see, Georgette loses 2 years of spousal benefits from her age 66 to age 68, for a total of $900 times 24 months, or $21,600!  I’m sure some of you are thinking that it does not matter since she has earned her own benefit.  But if we look at it that way we also have to admit that George paid into a system that earned for him his own benefit as well as benefits to be paid to a spouse or minor children.  He did not get a “discount” on his payroll taxes since his spouse was going to be ineligible to collect in the future.  He essentially paid for a benefit that he can now no longer collect.  And just because George decides to delay claiming to age 70, why should his spouse be forced to delay as well?  The “logic” behind this is shaky at best.

And by the way… if Georgette were below the age of 62 right now she would lose an ADDITIONAL 2 years of spousal benefits making the grand total for the loss under the new rules over $43,000.

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