Nearly every American either relies on Social Security now for a portion of his or her income, or hopes to do so in the future. Given how important Social Security is in planning for a financially secure retirement, new legal changes that took away key strategies like file-and-suspend and restricted applications for spousal benefits came as a shock to those who had hoped to use those strategies. Nevertheless, there are lessons for us all to learn from the latest Social Security debacle, and the sooner everyone truly understands them, the better we'll all be able to plan for our own retirement.
Lesson 1: You can't rely on Social Security.
Many people see Social Security as an entitlement to which they have a legal right. After all, having paid payroll taxes throughout your career, it's natural to view Social Security as owing you something in return. With most other retirement savings vehicles, such as pension plans and employer-sponsored 401(k) retirement accounts, what you pay into the system either gets credited to your individual account balance, or gives you well-defined rights to future payments that can only get changed under certain conditions.
Yet the Supreme Court has already ruled that Americans have no property rights to future Social Security benefits. In a 1960 case involving a law that took away Social Security benefits for Americans deported for being Communist Party members, the Court found that Congress had the right to pass laws affecting Social Security benefits without considering issues commonly associated with established property rights. Given the Court's view that the constitutionality of the Social Security program itself hinges on its redistributive nature, changes to rules like we've seen with file-and-suspend are completely within the realm of the federal government.
As a result, you can't really count on Social Security being there. Political considerations suggest that lawmakers will take existing recipients into account to some extent, as the grandfathering rules in the latest Social Security law show. Yet that's no guarantee that the exact strategy you want to follow will be there for you.
Lesson 2: Use smart strategies or risk losing them.
In one way, Social Security recipients were fortunate in the way that lawmakers handled the latest law changes: Those who were already eligible to use the strategies will have a final chance to do so. But that hasn't always been the case, and so it makes sense in evaluating any Social Security strategy to bear in mind that you could lose it at a moment's notice.
That's what happened in 2010 to those who wanted to use the so-called Social Security do-over strategy. For years, anyone could file to withdraw their application for Social Security, repaying any benefits they received without interest, and effectively starting over as if they'd never filed in the first place. That allowed participants to get income while keeping open the prospect of changing their minds in the future.
In a December 2010 rule change, the Social Security Administrative eliminated that provision for those who had started receiving benefits more than 12 months prior to the withdrawal application. It gave no warning, and no grandfathering rule was available, effectively trapping those who had counted on using the strategy in the future.
The lesson here is to have contingency plans in place when you're considering using a certain Social Security strategy, especially if it's controversial. That way, you'll be prepared if it disappears.
Lesson 3: Expect more pain from Social Security reform.
Many commentators have complained about the process that Congress used to eliminate file-and-suspend and restricted application strategies. As part of a budget deal, the measure faced huge time pressure. Some pointed to potential unintended consequences that could negatively affect certain Social Security recipients, such as divorced spouses who rely on an ex-spouse's work history.
Looking forward, though, the Congressional process shows how hard it will be to make more extensive changes to Social Security. With the program's trust fund slated to run out of money in about 20 years, the need for action will eventually come. When it does, Americans will have to be on their toes to ensure that backroom deals don't leave their benefits in tatters.
Social Security is the financial backbone for American retirement, but the latest law changes have made many people skeptical of its future value. Only by learning lessons from this recent episode will you be in the best position to make the most from Social Security while avoiding traps for the unwary.