November 18, 2015 | by Chris Stein, CFP®, Finance Instructor at Colorado State University
New Social Security Rules Cost Divorcee $48,000

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We have had our first live case of a person approaching retirement who is significantly harmed by the new Social Security rules we have discussed the past few weeks. Let me describe the situation facing 61 year old “Georgette”, a name we will use to protect her anonymity. The numbers have also been rounded to make it easier to follow. Georgette recently divorced after being married for well over 10 years and is concerned about her ability to retire. She did not end up with much in the way of assets from the divorce so is relying heavily on her Social Security retirement benefit. Let me do a simple comparison of Georgette’s situation before and after the passage of the 2015 Budget Bill on November, 2nd 2015.

Before the 2015 Budget Bill

Georgette planned to claim her spousal benefit at age 66, which was estimated to be about $1000 per month. She is eligible for this benefit by being married for more than 10 years prior to her divorce. This $1000 per month figure is based on her ex-husband’s earnings record. She is also eligible for her own earned retirement benefit, which was estimated to be $1136 per month at her age 66, but in order to maximize this benefit she was allowed under the old rules to restrict her application for benefits to just her divorced spouse benefit. This would have allowed her own benefit to grow 8% per year until it reached its maximum of $1500 per month at her age 70. Upon her reaching the age of 70 her plan was to switch to her own benefit from her spousal benefit. In a nutshell she was going to collect $1000 per month from 66 to 70 then collect $1500 per month after that. Her ability to deploy this strategy was due to her being able to file a “restricted application” at age 66. Under the new law the ability to file a restricted application is taken away from anyone not reaching age 62 by December 31, 2015. Georgette misses that date by a mere 3 months….

After the 2015 Budget Bill

Under the new rules barring her from filing a restricted application at age 66, Georgette can no longer file for a spousal benefit of any kind. Since her own benefit is slightly higher than the spousal benefit (1136 vs 1000) she will be required to claim her own benefit. She now faces a choice of receiving nothing from 66 to 70, but then getting the $1500 per month as before, OR filing before age 70 and permanently reducing her benefit that she is to rely so heavily upon in retirement. She has simply had the $48,000 in spousal benefits available to her under the old rules taken away without any sort of offsetting benefit… all because she was not born 3 months earlier.

Contact Your Congressman

We wanted to bring this example to life since we have been predicting this sort of thing would happen, not to the “rich” among us, but rather to the middle class (and in this case a divorcee) who rely heavily on Social Security as part of their retirement. In effect, her ex-husband has generated a spousal benefit from which no one can ever benefit. Georgette was not trying to “game” the system, but rather had made plans based on following the law. Now she is within 5 years of major retirement decisions and has had the rules suddenly changed on her. For this and other similar reasons we are very disappointed with how these changes were implemented. If you are disappointed as well, let your Senators and Congressmen know. They are the only ones who can fix this.

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