Even people decades away from retirement should pay close attention to how Congress just ended two lucrative ways of taking Social Security benefits, known jointly as the “claim now, claim more later” strategy.
One big lesson: Once claiming methods are seen as benefiting the affluent, they are labeled loopholes, and that puts them on the chopping block.
“They can go away, and they can go away fast,” says Michael Kitces, a partner and director of research for Pinnacle Advisor Group in Columbia, Maryland.
Typically, Congress foists big Social Security changes on younger people and phases them in over time, such as when it voted in 1983 to increase over the course of 22 years the age for full retirement benefits from 65 to 67 for people born in 1960 and later.
This time, though, Congress killed the maneuvers quickly. They will be gone in six months since President Obama signed the bill on Monday, and the decision affects people close to retirement age.
The outgoing strategies consisted primarily of “file and suspend,” which allowed married couples to start a spousal benefit while allowing the primary earner’s benefit to continue to grow. That worked in conjunction with “restricted application,” which let people collect spousal benefits for a few years and then switch to their own, maxed-out benefits at age 70.
Economist Laurence Kotlikoff, who co-wrote a best-selling book about Social Security claiming strategies, estimated that together, the two strategies could add $50,000 to many couples’ payouts.
The Obama Administration criticized such tactics as “aggressive claiming strategies” that allowed high-income households to maximize their benefits, although in reality any dual-income couple could benefit, Kitces said.
How popular the strategies actually were is open to debate. Most people currently file for benefits too early to take advantage of the tactics, which require waiting until full retirement age (currently 66).
But Mary Beth Franklin, a columnist who writes about Social Security for trade publication Investment News, said she is hearing from many people who had planned to use the strategies “and many of them are very upset that they won’t get the chance to execute their plan.”
No Rush to Benefits
The fear that claiming strategies might go away could tempt some people to think they should “lock in” their benefits by applying as early as they can, but that is the wrong lesson, said Franklin.
People who delay taking Social Security benefits will still come out ahead, even if they will not be as far ahead as they would have hoped using the claim now, claim more later strategy. And lower-earning spouses can still file for up to half of the primary earner’s benefit; they just have to wait until the primary earner files.
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Putting off filing for as long as possible is still the best way to maximize Social Security checks and protect against the risk of being poor in retirement.
Another lesson to take from the budget deal: Congress can fix Social Security, but it will not be pretty. The budget deal helped Congress avoid a big hike in Medicare premiums and a 20% drop in benefits for disabled people. But lawmakers waited until nearly the last minute to deal with the fact that both the Medicare and Social Security Disability Insurance programs were running short of money.
Making Social Security itself solvent will require changes that are much more controversial: cutting benefits, increasing taxes, further raising retirement ages. The longer Congress dithers, the more dramatic those changes will have to be.
The moral of the story is to not rely on any particular claiming or retirement strategy to remain unchanged. But that should not prompt you to make decisions that will leave you worse off.