Attention, retirees: Social Security loophole is closing

Sometimes when Congress gets around to closing a loophole in some government program, it's easy to lose sight of the fact that it's not just the affluent who will feel the pain.

It could be an even bigger issue with Social Security than it is with taxes, as baby boomers on their way into retirement are probably now finding out. That's because, with little notice, a pretty big loophole is about to close.

The federal budget bill that was signed into law last month eliminates some maneuvers that many people have used to increase the amount they ultimately collect from Social Security.

As a policy idea, it's easy to understand why that's probably a good thing, because Congress almost certainly never intended for the innovative tactics now being eliminated to be allowed in the first place.

Looking back at 15-year-old news coverage, it seems clear that Congress only wanted to let people work longer without losing Social Security benefits.

Of course, that's of little comfort to people now who had long planned on using the maneuvers themselves.

What has to be even more aggravating is that these changes didn't even get made in any sort of straightforward piece of policy legislation. Instead they were tacked on to the bipartisan federal budget bill that was signed into law in November.

Its popularity is easy to understand. Social Security pays through the end of a life, with payments adjusted for inflation. And benefits even go to spouses.

And unlike in a 401(k) program, workers have no chance to crimp their retirement lifestyle by blowing retirement savings in an ill-considered investment or by being sucked into a scam.

On the other hand, figuring how to best take advantage of Social Security is far from easy. Retirement for me is coming clearly into view, yet I am certain that until recently I had never even heard the term "claiming strategies."

A simple guide to these various ways to get benefits that came from Prudential Financial stretched 20 pages. It could just as easily have been 60 pages long and still left questions unanswered.

Those workers in their early 60s having trouble paying the bills probably don't need to bother with a dense guide like this. For them, collecting benefits as soon as they become eligible probably makes sense.

The most interesting approach was the one called "file and suspend," and it needs a little explanation.

Here the worker would file for benefits at full retirement age, currently 66, and then immediately suspend those benefits until 70.

That might seem like a dumb idea, voluntarily giving up a check from the Social Security Administration, except that the longer the worker waits the greater the checks, up 8 percent a year until the worker turns 70.

The risk is that the worker doesn't live long enough after age 70 to break even. But for people in good health who are expecting to live a long time, delaying benefits to get a bigger check is a basic principle in retirement finance planning. In the meantime workers use savings — or keep working — to pay the bills.

But here's where it got better. By filing for benefits, the worker triggers the eligibility of his or her spouse to collect benefits, which are typically about half the worker's benefits.

Another innovative approach was called filing a restricted application. That allows a worker to claim a spouse's benefit while not claiming his or her own, again allowing the worker benefit to build up to a higher payment to start when they get older.

This will still be available but not for long, only for people who have turned 62 by the end of the year.

It was common in higher-income families to use both of these tactics together, "and for a lot of higher income couples it was basically found money," said Griffin Geisler, who runs an internal information center for advisers at RBC Wealth Management in Minneapolis.

"And granted, high income and high net worth people are largely the people we advise," he said. "But some of these benefits strategies were actually applicable to average middle-class or lower middle-class people."

Examples that Prudential provided didn't come from the top 1 percent in family income. Prudential had one case of a hypothetical worker filing only for her husband's benefit and waiting to start her own benefits until age 70. That pushed her $1,200 monthly payment to nearly $1,600.

So this is the way this big change in Social Security looks to a 55-year-old:

It's good that a sloppy part of the Social Security law got cleaned up. It's disappointing that it had to come at the cost of another year of work.