On November 2, 2015, the Bipartisan Budget Act of 2015 wassigned by President Obama.

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While the primary purpose of this legislation was to authorizean increase in the federal debt limit, the inclusion of Section831, entitled “Closure of Unintended Loopholes” had a major effecton the popular claiming strategies of “File and Suspend” and“Restricted Application” used by many Social Security recipients.

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These strategies were allowed through provisions added in 2000by the Senior Citizens Freedom to Work Act through a conceptreferred to as “voluntary suspension of benefits.”

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The law allowed those who had already started collectingSocial Security benefits tostop their payments and earn additional retirement credits (delayedretirement credits).

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These claiming strategies became quite popular and allowed thoseentering retirement to formulate various methods to ensure thatthey take maximum advantage of their Social Security benefits.

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However, over the years, there has been significant debate overwhether Congress actually intended to create such a broad abilityto maximize benefits. The Center for Retirement Research publishedestimates that these strategies could result in an additionalannual cost of $9.5 billion to Social Security.

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The Obama administration's budget proposal for fiscal year 2015called for changes to the law to prevent “duplicative or excessivebenefit payments” including “aggressive Social Security claimingstrategies which allow upper-income beneficiaries to manipulate thetiming of collection of Social Security benefits in order tomaximize delayed retirement credits.”

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Let's look at how restricted applications and file and suspendworked. Then we'll look at the changes and how they willaffect Social Security benefits. Here arefive things you need to know:

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1. File and suspend and restricted applications — 'Theway we were'

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Restricted applications allowed an individual who was at leastfull retirement age, who had not previously filed for any benefits,and whose spouse has established a filing date (and may havesuspended), to file for only the spousal benefit based upon thespouse's record.

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The “restricted” terminology indicates that the filing is notfor their own benefit but for spousal benefits, which allows theirown account to continue to grow.

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File and suspend

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File and suspend allowed an individual who was at least fullretirement age (currently 66 years of age) to file for his or herown retirement benefit and then immediately suspend receipt ofthose benefits until a future date up until age 70.

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The act of filing established the date of filing which providesthe benchmark for dependent, spousal, children's benefits to bepaid. Generally, a spouse would then file for spousal benefits.

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The act of suspending invoked the process where the individualdoes not collect his or her benefits while still allowing othereligible individuals to collect. During the suspension, theindividual's account continues to grow at 8 pecent per year untilage 70.

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2. The effect of Section 831 of the Bipartisan BudgetAct of 2015 — 'The future is now'

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Section 831a – Restricted applications

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Section 831a effectively eliminates the ability to file arestricted application.

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Under the changes to Social Security law, anyone who applies foran early retirement benefit or a spousal benefit is “deemed” tohave applied for any and all available benefits.

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Anyone therefore who applies for reduced/early benefits wouldautomatically get the benefit that was greater—the retirement orthe spousal, but not both.

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Section 831a, as incorporated in Section 202(r)(1) of the SocialSecurity Act changes the “deemed filing” definition to include allbenefits rather than only early benefits, essentially extending the“deemed filing” to age 70.

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Therefore, a spouse will no longer be able to file a restrictedapplication to claim a spousal benefit at full retirement age, ashas been done in the past.

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Section 831b – File and suspend

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Section 831b, as added as Section 202(z) to the Social SecurityAct, mandates that if an individual files and then suspendsbenefits, then:

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All benefits payable to that individual are suspended — based onthe individual's earning record (retirement) and also ANY OTHERperson's earning record (spousal or children's). This requires thatif there is a suspension of benefits, it cannot be selective. Thismay also apply to benefits for an ex-spouse.

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No other individual will be eligible for benefits based on theearning record of someone who suspended benefits voluntarily. Thisrequirement negates the various file and suspend strategiesallowing one party to enable their spouse to collect while delayingretirement benefits.

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3. There is still time for some — but the clock isticking

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If you were born in 1954 or earlier — essentially turning age 62by the end of 2015 — you are still permitted to file a restrictedapplication at full retirement age (age 66).

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Of course, to file the restricted application, your spouse mustbe either receiving Social Security benefits or have alreadyexecuted a “file and suspend.”

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In addition, this “deemed filing” will not apply to individualsfiling for survivor benefits who will still be eligible forclaiming these benefits as separate from retirement benefits.

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This allows widows and widowers the continued option to maximizebenefits. This does, of course, presume that the survivor has notalready filed for their own retirement benefits.

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The assumption is also that the benefit would be larger than thesurvivor benefit, since if not, there would be no reason torestrict and later switch.

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File and suspend

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In regard to file and suspend, the rules go into effect sixmonths from effective date of legislation—April 29, 2016.

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An individual reaching age 66 by that date can continue to fileand suspend until that time. By doing this, the person invokingfile and suspend accomplishes two things:

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Delayed retirement credits continue to build for up to fouryears (to age 70).

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Allows payment of spousal and/or children's benefits, eventhough the filer's benefits are suspended.

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After April 29, 2016, turn out the lights, the party's over—noone will be able to file and suspend to trigger a spousal benefitor to protect the rights for retroactive benefits.

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However, there is one thing to be thankful for—in the originalversion of the legislation, those currently collecting under fileand suspend would have lost their benefits.

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A last-minute change to the bill provided a grandfatheredprovision protecting spouses and children, ensuring that thosecurrently receiving benefits before the effective date willcontinue to receive benefits.

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4. Long-term effects and strategies — what's left todo?

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The long-term effects of this legislative change remain to beseen. However, there are still things that wage earners can do tomaximize their benefits in Social Security:

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File and suspend — these are time-criticalstrategies:

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Individuals who are eligible should consider taking advantage ofthe “file and suspend” strategies if eligible to do so within sixmonths of November 2, 2015, enabling them to protect their optionsfor the future.

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Utilizing “file and suspend” before the rules change ensuresestablishment of a “claiming date” which allows an individual to,if necessary, file and request benefits back to the claimingdate—protecting the cash reserve that has been built up (ratherthan a six month retroactive rule).

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Restricted application—individuals who are already 62 years ofage or older still have the ability to utilize the restrictedapplication strategy until age 66.

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5. Other benefits remain

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Remember that the “core benefits” of Social Security areunchanged by the Budget Act—the calculations for benefits forworkers, spouses, and survivors remain the same and there are nochanges in the factors used to calculate benefits.

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Some things to be considered include the following:

  • Delayed retirement credits are NOT impacted by the legislation.One continues to earn delayed retirement credits if benefits aredelayed past Full Retirement Age.

  • The strategy of maximizing surviving spouse benefits by waitingto age 70 to earn the full 32 percent DRC remains, resulting in thesurviving spouse (assuming that they made less) being able tocollect maximum possible benefits.

  • A higher income earner might still want to take benefits priorto age 70 to allow for collecting of spousal or children benefitsat an earlier date.

  • And, of course, both spouses can still wait until age 70 to fileand earn the maximum amount of delayed retirement credits on theirown.

These changes happened suddenly and without public debate.Congress attached these changes upon emergency legislation to avoida default on the federal debt and to avoid large Medicare premiumincreases.

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As noted above, the 2009 Report from the Center for RetirementResearch estimated that the restricted application approach couldcost the SSA over $9 billion per year if everyone used it; theSocial Security Administration estimates that the elimination ofthese strategies will save approximately 0.02 percent of the 2.65percent of taxable payroll.

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AARP supported the changes with the justification that itaffected only a small group of retirees, noting that only one-tenthof one percent of all Social Security recipients utilized “file andsuspend.”

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In a statement issued from AARP's Director of Financial Securityand Consumer Affairs it was noted that “The claiming strategiesimpacted would apply entirely to future beneficiaries.”

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Although the changes caught most Social Securitybeneficiaries—and planners—off guard, there is at least some timeto react.

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