Last Friday, very early in the morning, the Senate passed the budget bill which now goes to President Obama to sign which will change Social Security rules dramatically. The main changes will be eliminating two relatively lucrative strategies – “file and suspend” along with “restricted application”.

Under old law

The “file and suspend” strategy, in many cases, enables the “restricted application strategy”. In combination, these strategies were used to allow the spouse with the higher social security benefit to “suspend” his or her own benefit, permitting the benefit to grow by 8% per year until age 70. The spouse with the lower social security benefit would then file a “restricted application” to take “spousal benefits” on the social security record of their spouse. The social security benefits of the spouse filing for “spousal benefits” would then also grew 8% annually until age 70. The purpose for the file and suspend strategy was to allow the lower earning spouse to be eligible to start taking spousal benefits from the higher earning spouse’s Social Security. In many cases, using this strategy enhanced Social Security payments for the couple throughout their lifetime.

Under New law

The new law changes this scenario and essentially gets rid of both strategies. The new law will not allow collection by a spouse or child based on the covered earnings record of a worker who suspends retirement benefits. So, in the case above, if you suspend your benefits, your spouse will not be allowed to receive spousal benefits. Additionally, no one who suspends his or her retirement benefits can collect an excess spousal or excess widow(er) benefit. Essentially, you get either your own benefit or the spousal benefit, whichever is higher.

Under the old law, a worker was allowed to go back and collect a lump sum payment for the time period their retirement benefits had been delayed. Often, this was advantageous if someone became terminally ill or their health decreased significantly. This too will no longer be available.

However, some people will get a break. Couples who are already using these strategies will be grandfathered. Their benefits will not be changed or interrupted due to the legislation. Also, if you turned 62 this year or are older, you will still be able to file a restricted application for only a spousal benefit starting at age 66. This will allow you to receive a spousal benefit while you defer claiming your own benefit so that it can grow. Finally, under the new law, the above provisions won’t go into effect for 6 months from the date President Obama signs the budget bill (approximately May 1, 2016). As a result, if you are 66 or older now or will turn 66 within that six month window, you can still file and suspend, assuming that would be advantageous. This would give a spouse who is also 62 the opportunity to file a restricted application.

What does this mean for you retirement?

For those that were counting on using this strategy, you should expect less income from Social Security. For some, it will mean that they will have to work longer than planned. For others, it might mean that they will have to reduce their spending (i.e., travel, second homes, etc.) during retirement. In either case, it is important update your financial plan to reflect these changes.