Social Security Strategy Nixed by Sneaky Congress

Amidst the drama over the budget battle last year, Congress snuck in new provisions that limit your options for claiming Social Security benefits. Under pressure from the Obama administration to close loopholes, Congress nixed the so-called “Restricted Application and File and Suspend” strategies.

A loophole in the law had enabled people to “voluntarily suspend their checks after they had applied for benefits,” according to the Wall Street Journal (October 29, 2015). That “made it possible for a worker’s spouse to start collecting a benefit based on the worker’s earnings record while the worker took advantage of delayed retirement credits.”

It may sound like an obscure maneuver. But it had been widely recommended to eligible clients by financial advisors. It enabled recipients to boost their benefits up to 8% per year.

Not anymore.

The upshot of these rule changes is that the Social Security Administration can report a tiny narrowing of the projected deficits for the program. But the savings amount to less than 1%. That’s nowhere near enough to serve as any kind of Social Security fix.

Coping with the Ever-Present Threat of Adverse Rule Changes

Expect the government to implement additional rule changes designed to thwart benefit-maximizing strategies. No one in Washington has the courage to go on record calling for benefit cuts. Instead, piecemeal tinkering is their chosen path for reducing growth rates of unsustainable commitments.

That means long-term financial planning with regard to Social Security and other benefits programs can only be tentative, at best. Plan A is that you get all the benefits you expect based on the current rules. But you need a Plan B. The rules can change to your detriment without notice.

That Plan B may include a variable annuity or other investments, employment or business activities, asset sales, or lifestyle changes.

We’ve warned that IRA and 401(k) accounts are also subject to adverse tinkering. Last year the Supreme Court ruled that when an IRA is inherited, it is no longer an IRA. That means the accounts are no longer protected from creditors.

In response to the new legal precedent, some financial advisors are urging clients to set up trusts as IRA beneficiaries. That way IRA assets retain some protective features after they get inherited. The rules can change at any time. Anything you can do to make yourself less dependent on unsustainable government promises will boost your retirement security.