Ever since President Barack Obama signed the Bipartisan Budget Act of 2015 which eliminates two key Social Security claiming strategies for future retirees, I have received numerous questions from readers worried that the current choice of collecting retirement benefits or survivor benefits would disappear.
“Given new rules, am I still able to apply for survivor benefit upon retirement or reaching full retirement age and switch to my own benefit at 70?” asked one financial adviser from New York who was widowed last year. The adviser said she is 61, still working and earning well above the phase-out limits that reduces benefits for people who claim Social Security before full retirement age.
“The new law does not change survivor benefits,” I assured her. “You can still claim survivor benefits first and switch to your retirement benefits later, or vice versa, whichever would result in a bigger benefits.”
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I urged the adviser to collect her full survivor benefits when she turns 66. They will be worth 100% of what her late husband was collecting at the time of his death. In the meantime, her own retirement benefits will continue to earn delayed retirement credits worth 8% per year for each year she postpones claiming them beyond her full retirement age up to age 70. At 70, she can switch to her own larger retirement benefit.
I cautioned that if she collected either her survivor benefit or retirement benefit before age 66 while she was still working, her benefits would be subject to earnings restrictions if she earned more than $15,720 in 2016. There is a higher earnings cap in the year a worker reaches full retirement age and it disappears at 66.
Separately, an adviser from Pennsylvania wrote to me with a question about one of his clients, a 62-year old woman who was divorced after 20 years of marriage. Her ex-husband died after the divorce.
He had advised her to claim her reduced Social Security retirement benefit of $953 per month now based on her own work record and to switch to her full survivor benefit of $2,457 per month at 66. But he wanted to make sure that strategy was still viable under the new rules.
“Can she claim now at age 62 from her own benefit and switch to the divorced spouse survivor benefit at age 66?” he asked.
“Yes, retirement benefits and survivor benefits are two different pots of money,” I assured him. “She can collect her own reduced retirement benefits now and switch to full survivor benefits at 66. But if she continues to work, she will be subject to earnings restrictions and her benefits could be reduced,” I explained.
Unfortunately, that is not what the client was told when she visited her local Social Security office where she was urged to collect her survivor benefit now, even though it would be permanently reduced to $1,991 per month if she collected at age 62. The adviser thanked me for backing up his advice to hold out for the larger survivor benefit that would boost his client’s retirement income by about 20% for the rest of her life.
The important thing to remember is even though her retirement benefits will be reduced for early claiming, her survivor benefits will not be reduced as long as she is at least 66 when she claims them. Survivor benefits do not earn delayed retirement credits and therefore do not increase if collected after full retirement age (aside from annual cost-of-living adjustments).
Shortly after President Obama signed the legislation on Nov. 2, 2015, the Social Security Administration issued a document explaining the impact of the new law designed to “eliminate aggressive claiming loopholes” by phasing out the ability of future retirees to claim only their spousal benefits at full retirement age and discontinuing the practice of allowing a worker to file and suspend benefits in order to trigger benefits for eligible family members during the suspension. In that document, the agency said “neither policy affects widowed spouses.”
Then in February, the Social Security Administration issued two separate emergency messages explaining the new rules. The one concerning the file-and-suspend strategy contained some odd language.
It said that anyone who submitted a request to file and suspend benefits on or after April 30 would be subject to new rules. In part, it said, anyone “who has requested voluntary suspension of his or her benefits will not be able to collect excess auxiliary benefits (including widows/widowers) on anyone else’s record.”
That last sentence concerns me. It seems that retirement benefits and survivor benefits remain two separate pots of money that can be collected at different times and in whichever order would be most beneficial to the individual. But if someone who was entitled to both types of benefits as a surviving spouse, or surviving ex-spouse requested to file and suspend their retirement benefit after April 29, it could eliminate their ability to collect survivor benefits during the suspension. Don’t make that costly mistake.
Mary Beth Franklin is a certified financial planner.
