Millions will see Social Security bump — here's what advisors should know

Millions of retirees could see a bump in their Social Security benefits over the coming months, according to the Social Security Administration.

Some 3.2 million people who receive a pension from work that was not covered by Social Security are now eligible for increased benefits. The change, part of the Social Security Fairness Act signed by President Joe Biden at the start of the year, eliminates the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO).

Beneficiaries affected by the law can expect to see retroactive, lump-sum payments going back to January 2024, with the payment expected to land in most beneficiaries' accounts by the end of March. Those affected by the change, including some teachers, firefighters and police officers, will also receive higher monthly Social Security benefits starting in April, according to the Social Security Administration.

The agency originally estimated that it could take a year or more for the changes to take effect, but automation has helped speed that process up significantly for most cases. Still, certain complex cases could take until 2026 before the updated law is applied to them, the SSA said.

"The American people deserve to get their due benefits as quickly as possible," said Lee Dudek, acting commissioner of Social Security, in a statement.

Financial advisors with clients who are potentially eligible for expanded benefits under the new law can take these three steps to help those clients.

Checking in with clients

The Social Security Administration said that beneficiaries affected by the new law will receive a mailed notice explaining the benefit change or retroactive payment. Advisors say the first step to take is simply reaching out to clients to ask if they have received a letter from Social Security.

If they haven't received a letter but should be affected by the change, it's important that advisors ensure their clients have up-to-date information with SSA, including an accurate mailing address.

Maximize the extra cash flow

The Congressional Budget Office has estimated that those affected by the WEP will see an extra benefit of $360 per month. That figure jumps to roughly $700 a month for those impacted by the GPO, up to $1,190 for beneficiaries whose spouse is deceased.

While payments will vary, it's important that advisors start talking with their clients now about what the additional income could mean for them, according to Mike Lynch, managing director of applied insights at Hartford Funds in Wayne, Pennsylvania.

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"[Advisors] want to have a conversation about, 'Should we take this benefit?' if they haven't filed yet, or if it's a lump-sum payment, 'What do we plan on doing with that?'" Lynch said. "You know, is it something we reinvest in the market, use for some expenses or a combination thereof?"

The promise of additional benefits could push some people to collect Social Security earlier than they originally planned to, Lynch said. But for individuals who haven't yet reached the full retirement age, claiming Social Security early could reduce their lifetime benefits.

Even with that penalty, the new benefit could still make enough of a difference in income for some workers to finally make the move to retirement.

That's exactly what happened with one of Lauren Lindsay's clients. Lindsay, a financial advisor at Beacon Financial Planning in Hyannis, Massachusetts, said that a 62-year-old client learned she was eligible for survivor benefits from Social Security after the new law took effect.

The client, a teacher who pulled back from full-time instruction but still works part-time at a preschool, will be able to fully retire now thanks to her new eligibility.

The new benefit is "something that really gives her a much nicer quality of life and allows her to do some more travel and things like that," Lindsay said. "So I'm really glad that we looked into it."

Be mindful of potential tax impacts

For clients who expect to receive sizable payments, advisors need to ensure the extra income is optimized for their taxes. That's especially true for lump-sum payments, which could potentially push a beneficiary into a higher tax bracket.

"I think it's always worth having a conversation and saying, 'If I do this, how does this affect other sources of income?'" Lynch said. "'Does it keep me on track with my goals and wishes?' 'Does it push me into a higher tax bracket?' Because hopefully, that's not what's going to happen, but that's something clients certainly want to be aware of."

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Even for beneficiaries who don't receive a lump-sum payment, expanded monthly benefits moving forward could push them into a higher tier of Social Security taxation, Lynch said.

As the new benefits start to roll out, it's crucial that advisors sit down with their clients to talk about how the additional income could fit into their long-term plans, he said.

"I think it's something where you really want to sit down, take a look at the documentation that you have, see what's available to you and say, 'Does this make sense for me to take that benefit?' Or, you know, think about maybe waiting a little bit," he said.