Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out maximizemysocialsecurity.com/ask-larry.
Section 831of the House’s new budget bill would make radical changes to the way Social Security provides spousal and retirement benefits.
Let me list all the benefit cuts and other problems arising from this truly draconian bill.
In six months, benefits now being received by spouses, divorced spouses or children on the work record of a spouse, ex-spouse or parent who has suspended his or her benefits willbe eliminated until the worker restarts his/her retirement benefit. I’ve never heard of a change in Social Security law that eliminates benefits for people already collecting, but this is what’s in this bill. This will cost millions of households tens of thousands of dollars. Worse, it will induce those who have suspended their benefits in order to collect higher benefits at 70 to restart their benefits at permanently lower levels in order to maintain their family’s immediate living standards.
For those now under 62, the billextends deeming, which now ends at full retirement age (age 66), through age 70. Deeming is the requirement that if a) you take your retirement benefit and are eligible to collect your spousal benefit, you are forced to take both at once and b) if you take your spousal benefit, you are forced to simultaneously take your retirement benefit.
Since Social Security effectively only pays the larger of the two benefits, being forced to take both benefits at once means that you lose one of the two benefits.
Under the current law, you can wait until full retirement age, take just your spousal benefit if you are eligible for it and then let your own retirement benefit grow. Being eligible requires having your spouse file for his or her retirement benefit. But if your spouse is at full retirement age or over, he or she can immediately file for and suspend his or her retirement benefit and let it grow through age 70. This strategy is called File and Suspend.
Some view this as a loophole, but Social Security is so complex that it’s hard to say what is a loophole and what’s not. We’ve been paying 12.4 percent of our income to Social Security since our first job in exchange for a variety of benefits, including spousal and divorce(e) spousal benefits, in retirement age. Now, with a couple of sentences, our government is reneging on what for many households can amount up to $50,000 in lifetime benefits.
But the loss in lifetime benefits can be far greater. Receiving full spousal or full divorce(e) spousal benefits between full retirement age (age 66) and age 70 helped tide millions of workers over until age 70 when they would start their own retirement benefit at a 32 percent larger (inflation-adjusted) value than at age 66. This provided them protection against excessive longevity — that is, outliving their assets and other non-Social Security means of support.
Now more of such cash-constrained households will need to file for their retirement benefits earlier than they had hoped. Thus, they lose not only most or all of their spousal benefits (since retirement benefits generally exceed spousal benefits, and you can’t get both at once if forced to take both at once), but also the far higher benefits available by waiting until age 70 to collect.
As a consequence, this new section 831 of the budget bill, ironically called “Protecting Social Security Benefits,” will make retirement far more precarious for millions of low- and middle-income seniors.
The ability to collect a full divorced spousal benefit between full retirement age and age 70 has also afforded important insurance to Americans getting divorced. This too would be wiped out.
Another major concern is female work incentives for married or divorced women (whose marriages lasted at least a decade) who earn much less than their husbands or ex-husbands. By waiting until 70 to collect their own retirement benefits, they had a chance that their retirement benefit would exceed their spousal benefit, which would mean that extra contributions to Social Security would lead to higher benefits. If they are now, due to cash constraints, forced to take their retirement benefit at full retirement age and if their spousal benefit exceeds their retirement benefit,they will end up getting absolutely nothing in return for each and every penny of taxes they paid to Social Security over their entire working lives.
I’m also concerned about how this bill would affect income sharing and power plays in marriages. Take the case of a wife who earned very little, because she stayed home to raise children. Assume her husband is the same age. If her working husband refuses to take his retirement benefit before age 70 — because he doesn’t want to receive permanently lower benefits — the wife will have to wait until age 70 to collect her spousal benefit. That means she’ll receive no income in her own name from Social Security until she reaches age 70. Indeed, if this bill is passed, the people that are going to see their Social Security checks disappear in six months are primarily women.
The new bill would also do great harm to households with disabled children. Under current law, a worker can obtain child benefits for his or her disabled child once he or she reaches age 62 if he or she files for his or her retirement benefit. If his or her spouse is not working, for example, to take care of their disabled child, the spouse can collect child-in-care spousal benefits. The worker who files at 62, however, has the option to suspend his or her benefit at full retirement age and restart it at a 32 percent higher value at 70. So the loss from taking benefits early to help his or her child and spouse collect benefits on his work record is mitigated. Under the proposed new law, if the worker suspends his or her benefit at full retirement age and restarts at 70, the benefits to the disabled child and the spouse are lost for all four years.
Finally, there is egregious inequality in the treatment of those born a few years apart. Someone who is now 70 and who has collected a full spousal benefit since 1966 and waited until this year to collect her retirement benefit will have received as much as $50,000 more from the system than someone in the same circ*mstances but who just turned 66.
To summarize, the new budget drastically cuts Social Security benefits for many of those now collecting, drastically cuts benefits for many of those who were about to collect, exacerbates Social Security work disincentive and induces households to do exactly the wrong thing, namely take their benefits too early at the cost of permanently lower benefits. And many of these changes will particularly hurt the middle class, womenand families with disabled children.
Update: For more information on how the budget bill affects your Social Security benefits, Larry Kotlikoff has written an update here. Note, the bill has been amended.
