Social Security and You: So-called 'new' rules apply to few

There is just so darn much misinformation out there about new Social Security rules. These rules have to do with the eventual elimination of the maximizing strategies known as “file and restrict” and “file and suspend.” Every single day, I get emails from readers who are panicking because they think they have to make some crucial Social Security decision by May 1. In truth, that deadline applies to relatively few people. I will detail more about that date later in this column.

And as usual, Internet rumors are fanning the flames of hysteria. I’ve even seen one website that claims: “Under the new Social Security rules, there are six magic words everyone must use when applying for Social Security benefits by April 30.” Supposedly, “you will lose tens of thousands of dollars” if you don’t say these mysterious words.

That’s hogwash! There is nothing magical or mysterious about applying for Social Security benefits under these ballyhooed new rules. In fact, the new rules are really the same Social Security rules that have been around for decades. It’s just that some of those old rules were shunted by unintended loopholes that grew out of some Social Security amendments passed a decade or so ago. Recent legislation got rid of those loopholes.

Before I explain the new rules, I’ve got to go over a few of the old rules.

The main concept you need to understand is Social Security’s “deemed filing” statute that has been on the books for more than half a century. This rule essentially says that when you apply for one type of Social Security benefit, you are deemed to be filing for any and all other Social Security benefits you qualify for at the same time.

Let’s follow an example: Wilma will be 62 years old next month. She is thinking of signing up for Social Security. Her husband, Fred, is 66 years old and is already collecting his own retirement benefits. Wilma wants to file for reduced spousal benefits on Fred’s record and wait until age 66 to claim full benefits on her own record. She cannot do that because of the deemed filing rule. Instead, she must sign up for her own reduced retirement benefits, after which point she can claim any extra reduced spousal benefits she may be due.

Please note that the deemed filing rule has never applied to widows and widowers — under the old or new rules. For example, if Wilma were a widow, she could file for reduced widow’s benefits at age 62 and wait until either age 66 or 70 to claim her own higher benefits.

Besides the widow/widower exception, a loophole developed in this deemed filing rule: If you waited until age 66 to file for benefits, you would have the option of taking spousal benefits and delaying taking your own until age 70. Following my example, if Wilma were 66 years old, she could have taken half of Fred’s benefits and delayed claiming her own benefits until age 70, at which point she would get a 32 percent bonus. This is known as the “file and restrict” strategy. In other words, she would wait until age 66 to file for benefits, but at that time, restrict her application to spousal benefits. (Please note: This is entirely separate from the “file and suspend” strategy discussed later in this column.)

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The new rules closed the “file and restrict” loophole. But it left the loophole open for anyone who will turn 66 before January 2020. Because Wilma turns 62 next month, she turns 66 in March 2020. So the loophole is closed for her. Had she been born a few months earlier, she would have had the option of waiting until 66 to “file and restrict” for spousal benefits.

Another way to put this: If you were born after January 1954 (meaning you would turn 66 after January 2020), you must live by the original Social Security deemed filing rules. When you sign up for Social Security, you must apply for all benefits you are due. However, if you were born before January 1954, you’d have the option of playing the “file and restrict” game when you turn 66.

So to repeat: If you are 66 (assuming you are born before January 1954) and you want to “file and restrict,” meaning you want to file for spousal benefits first and save your own until later, you have four more years to do it.

The May 1 deadline that everyone is panicking about has to do with another strategy called “file and suspend.” Once again, to understand the new rules, we must go over the old rules. And those old rules said this: If a primary wage earner’s benefits are suspended, those benefits are also suspended for anyone else due benefits on their account.

The loophole that grew out of those Social Security amendments I mentioned allowed someone age 66 or older to suspend his or her benefits, while allowing a husband or wife to continue to collect spousal benefits. Here is an example of this “file and suspend” strategy: Barney is 66 years old and doesn’t want to start collecting his social security until he is 70. His wife, Betty, is 62. She has never worked outside the home. Because of the loophole to the old rule, Barney was able to file for his benefits and then immediately suspend them while Betty was able to continue claiming spousal benefits.

The new rules eliminated that loophole for anyone turning 66 after May 1, 2016. After May 1 we will revert back to the original Social Security rules that say if Barney’s benefits were suspended, then Betty’s spousal benefits would also be suspended.

It’s important to understand that Barney still has every right to wait until age 70 to claim benefits. It’s just that under the new rules (which again, are really the original rules), if Barney delays his benefits, then Betty’s spousal benefits will also be delayed.