You may have heard various dates thrown around predicting when the Social Security trust fund will finally run dry. It’s a favorite current events small-talk subject (or maybe that’s only in the finance-nerd circles I run in.) I’ve been telling my baby boomer clients for years that they probably have very little to worry about. Surely congress will gut the other programs available to them before they dare disturb an 80-million-strong voting population. Late last October, with the passage in the U.S. Congress of the Bipartisan Budget Act of 2015, I got to eat some crow. You may not have seen much coverage of this bill in the news media. But tucked into the routine budget bill that allowed the government to avoid a shutdown is some curious language relating to Social Security retirement benefits.
What the bill does is eliminate some so-called “creative filing strategies” that have been available to seniors since anyone can remember. The most popular of these is known as “file and suspend.” If you are the spouse with the lower lifetime earnings, and you have reached full retirement age (FRA), this allows a you to elect your benefits, then immediately suspend, or turn off, said benefits. You are now able to elect spousal benefits based on your spouse’s earnings, while allowing your own retirement benefits to continue to “roll up” until you are ready to turn them back on.
This bill was overwhelmingly supported on both sides of the aisle, and numerous articles have been written since then explaining why these changes have minimal impact on most seniors. The problem with statistics is when they don’t apply to you. However little the average person might have saved with these strategies, they made a huge difference to some people, such as divorcees for example.
In his Forbes article, Jamie Hopkins states, “Most of these changes are not entirely surprising as President Obama’s budget proposals over the last few years have made mention of reducing and eliminating ‘aggressive claiming strategies.’” That sounds a lot like the “loophole” argument that politicians love to use when raising taxes. My response would echo United States district judge Learned Hand, who stated in 1935, “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” By this definition, a “loophole” is just a piece of tax code that a politician finds inconvenient.
Mr. Hopkins goes on to say “the most shocking part of the current budget agreement is how quickly this rule change will be implemented and the fact that it would eliminate Social Security benefits for people already collecting.” This puts a very clear point on my frequent caution to retirement planning clients: consider Social Security to be “gravy.” If you rely on the government for your well-being in retirement, don’t forget that they can change the rules whenever and however they choose, and you might have no choice but to play by the new rules.