Social Security Income Claiming, How the Bi-partisan Budget Act of 2015 Impacts Women

November 2, 2015 ~ why should accountants and other financial professionals care about this date?

Early in the last week of October the Bi-partisan Budget Act of 2015 (BBA 2015) was passed by the House and headed to the Senate.  This legislation included the new Social Security Act Provision 831, titled “Closure of Unintended Loopholes” that would eliminate two claiming strategies.   I had trouble sleeping that night.

My anxiety grew as the Senate quickly passed the legislation and sent it over to President Obama, who signed it into law on Monday, November 2, 2015.  This date will now be in the history section of the courses I teach on Social Security.

Since 2011 I have been working to educate financial professionals and retirees about Social Security.  It is one of the least understood financial planning topics by Americans and tragically, the consequence of this lack of knowledge is costing retirees significant amounts of income throughout their years of retirement.  Those most affected by the misunderstandings and incorrect information are often the ones who need Social Security the most and are more likely to be women than men.

As accountants and financial professionals, you have a valuable advisory opportunity with clients and can therefore play a critical role by encouraging them to become more educated about their Social Security income election decision.  Asking clients a few brief questions about how and when they plan to collect Social Security will elicit a stream of confusion, frustration and worry from most retirees.  The rules are complex and they don’t know who to turn to for help.

You may not particularly want to be the one educating them (although it is extremely rewarding if you do), but just bringing up the topic and directing them to those who can help, will get them on track.  Clients will appreciate your knowledge about Social Security and your concern in helping them make the smartest income claiming decision that works for their unique financial situation.

Social Security is also a topic that opens the door to a number of other financial concerns including: Do you feel prepared for retirement?  If not, what are your biggest concerns?  What financial and personal goals do you have?  Have you calculated the assets and income streams you’ll need to meet those goals?  Do you understand how your asset withdrawals and Social Security income amount can combine to increase your tax liability?  Are you concerned about out living your assets?

How the Bi-Partisan Budget Act Affects Women

Let’s get back to the BBA 2015.  Regardless of the reasons that Congress passed the law, including their own misunderstandings of those reasons, the ramifications will disproportionately affect the retirement financial welfare of women in a negative way.  Why is that?

The two Social Security claiming strategies that are being phased out are both related to the spousal benefit.  A spousal (or ex-spouse if divorced) benefit is 50% of the other spouse’s Primary Insurance Amount (PIA), which is the monthly benefit that worker would collect at their Full Retirement Age (FRA).  It was created in the early years of Social Security and instrumental in transforming the program from a worker’s retirement plan to a family social insurance program.

In the year 2000 a number of changes to Social Security were made when the Senior Citizen’s Freedom to Work Act was passed.  Although collecting Social Security is often synonymous with “retirement” and specifically “not working anymore”, retirees are able to collect Social Security even if they are still working. 

Prior to 2000 though, retirees up through age 70 who were still working and also collecting Social Security were subject to the Earnings Test rule.  Based on their age and the amount they earned over certain thresholds, some of their Social Security income was held back.  In 2000 this changed by exempting those over FRA from the Earnings Test.

One of the other changes in 2000 allowed those over FRA who were collecting Social Security to “voluntarily suspend” their benefit and start it again at a later date.  This enabled retirees to return to, or continue working while their Social Security income benefit continued to grow at 8% per year from delayed retirement credits.

Once a worker has filed for Social Security and either starts collecting benefits or “voluntarily suspends” them, their spouse is then eligible to start collecting the spousal benefit.  Therefore the voluntary suspension provision in 2000 allowed for one of a couple to “file and suspend” their benefit while the other “filed a restricted application to collect a spousal income benefit only”.

In the case of a “traditional couple” the wife’s PIA might be significantly lower than even 50% of her husband’s PIA.  By using these strategies, she could start collecting a spousal benefit as her husband’s larger retirement benefit continued to grow while he delayed collecting until age 70.  Perhaps most importantly, this provided that the largest possible individual Social Security benefit from one of the spouses would then be available for the survivor of the couple.

Married women are the most likely survivors of a couple due to their average longer life expectancies and often being married to men older than themselves.  They may spend 5, 10 or even 20 years as a widow.  When one of a couple dies, the survivor “inherits” the higher of the two Social Security income benefits.  Therefore it is critical for couples to maximize this survivor income stream for whoever is the survivor, most likely the woman.

The BBA 2015 Social Security Act Provision 831 does indeed affect today’s retirement age women considerably more than it does men.  It is my belief that the elimination of these two strategies – “file and suspend” and “file a restricted application for spousal benefits only” – will have a significant impact on the ultimate financial security of women in retirement.

With the first Baby Boomers just reaching age 70 in 2016, a vast number of clients – both women and men – will continue to need help optimizing their Social Security income election for the next 10 to 15 years.  Helping them with this analysis or outsourcing it to a qualified specialist is a win-win for you and your clients.