Does the new Social Security law stop you from reclaiming your suspended benefits? Maybe not

Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out

Editor’s Note: Boston University economist Larry Kotlikoff has spent every week, for over three years, answering questions about what is likely your largest financial asset — your Social Security benefits.

Since the 2015 Budget Act changed a number of Social Security rules, we’ve been keeping readers updated on what the changes mean for your Social Security benefits. If you haven’t yet read Larry’s comprehensive coverage of the changing Social Security rules, check out his columns, “This is not how you fix Social Security” and “Congress is pulling the rug out from people’s retirement decisions.” And if you haven’t read his 12 secrets to maximizing your Social Security benefits under the new rules, now is the time to do so.

Today, we have an extremely technical article about the budget act’s language regarding the lump sum option. It’s a bit abstruse, but important and could mean a lot of money for a number of beneficiaries and their families. We feel obliged to publish this conversation, so we can get to the bottom of what the new law’s language means for the lump sum option. Does it live on or not?

We’ll continue publishing updates on what this new law means for your Social Security benefits. Stay tuned.

— Kristen Doerer, Making Sen$e Editor

Alan Skupp is an attorney who lives in Livingston, New Jersey. He and his wife run a market intelligence company. Alan wrote me about one of the provisions in the new Social Security law, which I and perhaps everyone else in the country take to mean that if you suspend your retirement benefit after April 29, 2016 (in order to let it accumulate delayed retirement credits), you lose the opportunity to change your mind and request that Social Security pay you all suspended benefits in a lump sum. As Alan’s email indicates, the sections of the old law, which this particular provision in the new law references, suggest a very different interpretation.

The best way to see what’s involved is via an example. Suppose Joe, now 66 and a half, has never filed for retirement benefits. Since he never married, he realizes that if he continues to wait until 70 to collect his retirement benefit at its highest possible value, as is his plan, he won’t get much of anything for himself or anyone else if he develops a brain tumor at say 69 and is given three months to live. So he heads down to Social Security and files for and also immediately suspends his benefit. Sure enough, at 69, Joe develops a brain tumor and is given three months to live. He rushes over to Social Security and requests all his suspended benefits retroactive to when he first turned 66 (full retirement age).


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My belief has been that Social Security, due to the new law, would tell him to get lost. But Alan thinks they would pay him all his suspended benefits in a lump sum, but only from the time he first filed for benefits — that is, they would give him back benefits from 66 and a half and not from age 66; they would not include benefits that were retroactive to before he first filed.

Alan makes a compelling argument that he’s got it right and all the rest of us have gotten it wrong. And I’ve changed my own opinion on this accordingly. However, if someone else convinces me otherwise, you’ll be reading another column saying I reverted back to my original opinion. One thing that is perhaps telling that runs in support of Alan’s view is that Social Security has not altered its website on this issue. I say “perhaps,” because it could just be that the Social Security Administration hasn’t updated their website yet.

We reached out to Social Security for some clarification. Dorothy J. Clark of the Social Security Press Office responded:

At this time, our legislative and policy staffs are diligently working with Congress to analyze the intent of the legislation and update our instructions.

I do not have a date, but I will respond when new information is available.

We’ll keep you updated on what we find out.

Alan Skupp: New Year’s greeting from a Boston University alumnus and a fan of your work, particularly on the looming federal debt crisis. I am writing to you, because I believe that the view that the Bipartisan Budget Act of 2015 ended the ability to suspend Social Security benefits, but then resume benefits and request a lump sum payment (rather than higher monthly benefits) is incorrect. Admittedly, the other “loophole closers” in that legislation were much more significant, but regardless of that fact, I think the record ought to be set straight, as there are people for whom the lump sum strategy will be important. I hope you will take the time to read my analysis and let me know your reaction.

Whether or not the drafters of the budget bill intended to prohibit the lump sum option (I don’t think they did), the language they used does not do so. As a matter of fact, rather than ending the lump sum option, the language of the budget bill codifies this option as part of the Social Security Act. Previously, it was permitted by the Social Security Administration’s practice, but it was not set forth in the language of the Social Security Act itself.

The budget bill adds a new subsection (z) “Voluntary Suspension” to Section 202 of the Social Security Act (42 U.S.C. 402). Other than in situations where an individual’s entitlement to benefits would be ended by other provisions of the Social Security Act (for example, prisoners in jail, deportation, making false statements to obtain benefits, etc.), this new subsection now explicitly grants the right to suspend benefits to an individual who has attained retirement age. The suspension begins the month after the month in which the request is received and ends the month after the month in which a request for resumption is received (or attainment of age 70).

The new language relevant to the lump sum option reads:

(3) In the case of an individual who requests that such benefits be suspended under this subsection, for any month during the period in which the suspension is in effect (A) no retroactive benefits (as defined in sub-section (j)(4)(B)(iii)) shall be payable to such individual…

Importantly, that subsection – Section 202 (j)(4)(B)(iii) – reads: “the term ‘retroactive benefits’ means benefits to which an individual becomes entitled for a month prior to the month in which the application for such benefits is filed.” Part of Section 202(j) of the Social Security Act is the provision relating to situations when someone is inadvertently late in filing or otherwise files after entitlement began and asks for the filing to be treated as if made earlier. It relates to periods prior to the filing of an application for benefits.

In order to request that “payment of such benefits be suspended” under the new subsection (z), an individual must first (or at the same time) have filed an application for benefits. Otherwise, how could benefits be suspended? The reference to “retroactive benefits” in the new subsection (z) cannot be referring to benefits that would have been payable during the suspension period since these benefit payments cannot relate to months prior to filing an application for benefits. Therefore, while commentators have interpreted the recent amendments to the contrary, there is no new prohibition on a request for a lump sum payment of previously suspended benefit payments in the new amendments to the Social Security Act.

Apparently, the Social Security Administration does not disagree. I could find nothing issued by the Social Security Administration after enactment of the Bipartisan Budget Act to indicate that Social Security Administration itself believes that the amendments end the lump sum option. For example, the Social Security Administration Office of Legislation and Congressional Affairs December 2015 publication “Bipartisan Budget Act of 2015 Closes Social Security Loophole” says nothing about ending the lump sum option. The Social Security Administration’s webpage titled “Retirement Planner: Suspending Retirement Benefit Payments” as of today not only does not mention an end to the lump sum strategy, but rather still permits it:

If your benefit payments are suspended, they will start automatically the month you reach age 70. If you change your mind and want the payments to start before age 70, just tell us when you want your benefits reinstated (orally or in writing). Your request may include benefits for any months when your payments were suspended.

Similarly, as of today, the Program Operations Manual GN 02409.130 “Voluntary Suspension Reinstatement” remains unchanged, reading: “The RIB beneficiary who requested suspension may at any time request benefit reinstatement as of any month in the suspension period.” Program Operations Manual GN 02409.100 “Voluntary Suspensions” also remains unchanged since Nov. 4, 2014. I do note that the Social Security Legislative Bulletin Number: 114-8, dated Nov. 3, 2015, does say that the new amendments prohibit “any individual from receiving retroactive benefits for a period of voluntary suspension.” While this may imply that the lump sum option is dead to the casual reader who might understand “retroactive benefits” to mean benefits payable but unpaid during a period of voluntary suspension, the actual statute says otherwise: “retroactive benefits” has a specific statutory meaning. Finally, the Congressional Summary of the amendments is vague, saying:

(Sec. 831) Provisions in the Social Security Act related to deemed filing, dual entitlement, and benefit suspension are amended to prevent individuals from obtaining larger benefits than Congress intended.

As you undoubtedly know, a sound argument can be made that the lump sum option does not provide larger benefits than Congress intended, because the monthly payment is the lower amount calculated as of the earlier date and given a positive discount rate.

The above analysis does raise the question of what this language actually achieves. I find it hard to believe that the draftsmen would have mistakenly selected the very clear definition of “retroactive benefits” in Section 202 (j)(4)(B)(iii) by mistake. I think it simply is designed to make clear that if an individual suspends benefits, the few months (generally up to six, but in some cases 12 months) of retroactive benefits he could also be claiming if he files and then suspends will have to be suspended too. I suspect that it was just to avoid administrative burden. For example, if someone files, but also requests retroactive benefits and then quickly suspends, under the new language the suspension cannot take effect until the month after receipt, and the retroactive benefits would have to be paid now, not suspended (the language in 202 (z)(3)(A) avoids this situation).

So there you have it. In my view, the lump sum option lives on.

Avram Sacks, one of our country’s foremost Social Security attorneys, agrees, on balance, with Alan’s reading of the law on this point.

Avram Sacks: Attorney Alan Skupp’s analysis points to what I see as an ambiguity in the wording of the text of the provision in question, new subsection (z) of Social Security Act §202, added by the Bipartisan Budget Act of 2015 (PubL 114-74).

In particular, our focus is on paragraph (3) of the new subsection, which reads as follows:

(3)     In the case of an individual who requests that such benefits be suspended under this subsection, for any month during the period in which the suspension is in effect

(A)    no retroactive benefits (as defined in subsection (j)(4)(B)(iii)) shall be payable to such individual;

(B)    no monthly benefit shall be payable to any other individual on the basis of such individual’s wages and self-employment income; and,

(C)    no monthly benefit shall be payable to such individual on the basis of another individual’s wages and self-employment income.

So, what is the meaning of the highlighted text, “for any month during the period in which the suspension is in effect?”

It could mean:

A) One may not seek a retroactive payment of benefits for any month (that is, with respect to any month) during the period in which the suspension is in effect. In other words, so long as the suspension is in effect and once an individual requests that benefits be resumed, any payment of benefits may not include a retroactive payment of a benefit that would have otherwise been paid for that month, but for the suspension.

This is a reasonable and plausible interpretation of the provision, particularly because of the wording, “for any month during the period in which the suspension is in effect.”  In other words, the retroactive payments can only be referring to payments that would have been accrued for the months of suspense. But, there is, indeed, a problem with this interpretation that Mr. Skupp carefully lays out. “Retroactive benefits” is a term of art. That new subsection directs us to understand that “retroactive benefits” is to be understood in light of its definition in the Social Security Administration §202(j)(4)(B)(iii). There, it unambiguously states: “As used in this subparagraph, the term ‘retroactive benefits’ means benefits to which an individual becomes entitled for a month prior to the month in which application for such benefits is filed.” Since one may not suspend a benefit until one has applied for it, the teaching of §202(j)(4)(B)(iii) is that only months prior to the claim for benefits and thus prior to the period of suspension may be treated as months for which a retroactive payment may or may not be made. In other words, retroactive benefits can only refer to the months prior to the period of suspense.

This leads to the second possibility:

B) During the period of suspense, one may not seek retroactive payment for months that preceded the claim for benefits. This is the interpretation that Mr. Skupp is advancing. On its face, this would have to be the meaning of the provision since “retroactive payments” is unambiguously defined as payments for a period that precedes the claim.

But why? Mr. Skupp surmises that it in order to relieve the “administrative burden” of paying a retroactive benefit during a period of suspense.

Realistically, this is not a burden and has never been claimed to be one. The provision appears in Section 831 of the Bipartisan Budget Act of 2015, a section that is titled, “Closure of Unintended Loopholes.” How is payment of a retroactive benefit during a period of suspense a loophole? In the run up to this legislation, such payments were never identified as a loophole. After exhaustive review, I could find no reference in the Congressional Record to any discussion of this provision. Indeed, what appears to be the primary driver of this legislation is an article by Alicia Munnell, Director of the Center for Retirement Research at Boston College, in which she claims that file and suspend and the non-deeming of spousal benefits after full retirement age are loopholes that could cost taxpayers as much as $1 billion and $9.5 billion, respectively. She says nothing, however, about lump sum payment of retroactive benefits — neither does the Congressional Record and neither do official legislation summaries.

I believe either interpretation is equally plausible.

It makes more sense that the intention was to prevent lump sum payments of suspended benefits. Could it be that there is an actuarial advantage to the trust fund by banning the payment of such lump sums? On its face, the provision bars retroactive payment for any month, not during any month, during the suspension period. But the definition that same provision forces us to use, the one provided by the Social Security Act §202(j)(4)(B)(iii), bars consideration of suspension months as months for which benefits are retroactively paid. Thus, on its face, one has to accept that “retroactive benefit” can only have one meaning here — the meaning ascribed to it by the Social Security Act §202(j)(4)(B)(iii) — although I do not believe that this was the intended meaning.

Some mention was made that the absence of any change to the voluntary suspension provisions of the POMS substantiates the assertion that retroactive benefits can only refer to the meanings ascribed to it by the Social Security Act §202(j)(4)(B)(iii). I would not assign too much weight to this. The voluntary suspension provisions in the POMS §GN 02409.100 and what follows has yet to be revised since enactment of the legislation. All but one dates from November 2014.

The bottom line is that while the drafters may have intended to bar lump sum payments of benefits that might have accrued during a period of benefit suspension, what was actually barred are payments during a suspension period of benefits for months that preceded the date of application and then only during the suspension period.

Alan Skupp: I am glad to have your concurrence with my conclusion that the lump sum option was not prohibited by the budget act. A few additional comments, if you don’t mind chatting a bit more on the subject.

I would take some issue with your view that each of the two interpretations is plausible. It is not as if the drafters simply used an ambiguous term (“retroactive benefits”); rather, they went to the trouble of selecting a specifically-defined term. Maybe my faith in our government brethren of the bar is too high, but I find it hard to believe that they opted to use a term that was not merely ambiguous, but rather a term that unambiguously negated their intent. Since the statute must be read as a whole, not first with plain meaning of text and then with application of defined terms, in my view there really is only a single plausible reading, which is what prompted my email to Larry. I didn’t have a problem with “for any month” language because what makes the benefit a “retroactive benefit” is that the claimant “becomes entitled” (Social Security Act 202 (j)(4)(B)(iii)) to it in the month in question (and it must be the benefit for a pre-application month).

I also wonder whether it does, as you say, make more sense that their intension was to prevent lump sum payments. It seems to me that the economics of the lump sum are as follows: If we assume that the Social Security Administration’s adjustment factor accurately adjusts delayed retirement credits to equalize the expected value to the claimant and corresponding cost to the system over the three to four year period from retirement age to age 70, at first we would say the system should be indifferent to a claimant who a) retires at retirement age, b) retires at 70 or c) suspends at retirement age and then elects a lump sum prior to age 70. However, I see two other factors at work.

If a positive discount rate and upward sloping yield curve exist, then any election to suspend and then take a lump sum would be a net benefit to the system (the system holds and invests payments that would have been paid out earlier, with no delayed retirement credit adjustment to payments made after the lump sum is paid). The bigger factor I think is the moral hazard that arises as a result of the option given to the claimant. That is, claimants in the aggregate will be more likely to exercise the option they hold in situations where its exercise benefits them and hurts the system. Put more starkly, there will be more exercises of the lump sum option in situations where the claimant expects to die early, depriving the system of the lower cost of fewer monthly payments before death (albeit at a higher monthly rate). Another example would be increased exercises of the option if benefit changes that would hurt claimants but help the system were in the offing. I will leave it to others to ponder whether the Social Security Administration had this in mind, but I tend to doubt it given the choice of the defined term. Of course, I readily admit that I am a complete amateur when it comes to the Social Security Administration and its thinking.

Avram Sacks: The ambiguity is in the use of the preposition “for.”

As to the economics involved, I am no economist, but the other factors you mention support my argument that there may have been an economic reason to bar lump-sum payouts.

I do think you give the drafters of the legislation too much credit. This was hastily drafted with zero legislative discussion. As legislative summaries go, the one provided is pretty thin. Mistakes do happen all the time and often get fixed in a technical corrections bill. Some escape notice for years. I continue to maintain that drafters intended to bar a large lump sum encompassing the period in suspense, rather than for the six months that preceded the benefit application date (assuming the application was submitted six or more months following the month in which full retirement age was attained). Let’s take another look at the language:

(3)     In the case of an individual who requests that such benefits be suspended under this subsection, for any month during the period in which the suspension is in effect —

(A)        no retroactive benefits (as defined in subsection (j)(4)(B)(iii)) shall be payable to such individual;
(B)        no monthly benefit shall be payable to any other individual on the basis of such individual’s wages and self-employment income; and,
(C)        no monthly benefit shall be payable to such individual on the basis of another individual’s wages and self-employment income.

Looking closely at this language, I have just discovered another problem with your interpretation.

Under the old rules, retroactive benefits could be paid after the period of suspension is over. (See POMS §GN 02409.110B.2.) Assume full retirement age is attained in July 2016. Let’s say a claimant, who we’ll call Charlie Claimant, claims and suspends in January 2017. By law, his claim in January can be made retroactive for up to six months (12-month retroactive claims are only allowed in disability cases) as according to Social Security Act §202(j)(1). So his claim is retroactive to July 2016.

The question to ask is: “For what month is the suspension effective?” Under 20 CFR 404.313, Charlie could suspend for any month for which he had not yet received payments, including prior months, so long as they were no earlier than the month he attained full retirement age. POMS §GN 02409.130 confirms this. However, under the new law, the suspension can only be effective with respect to the month following the month the request is received, according to Social Security Act §202(z)(1)(A)(i). If Charlie claims and suspends in January 2017, he can claim retroactively as of July 2016, and he will get paid in February 2017 for July 2016 through January 2017. Per the new Social Security Act §202(z)(1)(A)(i), the suspension begins in February 2017. Alternatively, he can claim and suspend in January 2017 beginning with the benefit payable for February 2017. In June 2020, Charlie learns he has an inoperable brain tumor and is given a prognosis of less than one month. He has no spouse who might be eligible for a widow’s benefit, but he has children. So he now wants to retroactively collect a lump sum for all the months his benefit was in suspension. According to your interpretation, he could not get paid benefits for the months that preceded the month of suspension. But he couldn’t get paid those benefits anyway because had he retroactively filed at the time he filed his claim in January 2017, he would have been paid those benefits in February since Social Security Act §202(z)(1)(A)(i) barred him from retroactively suspending. And if he hadn’t retroactively filed, it is now too late to do so, since one can only retroactively file for six months, unless a disability claim is involved. That leaves the other plausible interpretation, which is that benefits accrued during the months of suspense may not be retroactively paid.

The point is, due to unartful legislative drafting, there is a huge ambiguity. There are problems with each of the two alternatives. It makes more sense that Congress would seek to bar a 4-year lump sum payment rather than a six month lump sum payment. Because there are so many difficulties with either interpretation, I believe either is plausible. The courts will likely have to sort it out if Congress doesn’t fix it.

Alan Skupp: Let me begin by repeating that my basic point is that the language, as drafted and passed, does not prohibit a lump sum. My suppositions about what might have been intended and my comments on the economics are irrelevant to how the statute ought to be construed given the clear and explicit definition of “retroactive benefits.” It does not require a tortured reading to make sense of the statute while giving effect to the definition of “retroactive benefits.” Similarly, even if, as you say, it makes more sense that Congress wanted to bar the four years rather than the six months, that too ought to be irrelevant to interpretation of a statute that is not ambiguous on its face. I say “ought” in both cases, because after what the Supreme Court did with an unambiguous statute in King v. Burwell, maybe I should instead fold my tent right now. So it is entirely possible that the Social Security Administration will say that Congress obviously intended to end the lump sum, but that doesn’t change my original point to Larry that it should not be taken as certain that the lump sum was prohibited by the budget act — at least not without a fight.

In your example, I am confused as to the problem. Charlie files and requests payment of retroactive benefits (back to July 2016) in January 2017. He either simultaneously suspends or suspends shortly thereafter such that the month of receipt of the suspension request by the Social Security Administration occurs soon enough that the retroactive benefits have not yet been paid. If not received soon enough, the retroactive benefits (presumably along with a monthly benefit payment) are paid and the suspension goes into effect the next month, or if timely, then payment of both retroactive benefits and monthly benefits are suspended. At the time of resumption or if a lump sum is requested, benefits are calculated at the rate as of the first retroactive month (July 2016) or first suspension month, as the case may be. I don’t see how 202(z)(1)(A)(i) bars the suspension of payment of the retroactive benefits and requires them to be paid in February. So my answer to the question of “for what month is the suspension effective?” would be to rephrase it to mirror the language of the statute, that is: “for what month is the suspension in effect?” And the answer would be starting in early 2017, not July 2016.

Editor’s Note: Emphasis added to the highlighted portions of quotes from the Social Security Act and Social Security Administration.