Seniors and those collecting Supplemental Security Income (SSI) received some good news in the 11th-hour budget deal recently passed by Congress. In addition to averting a government shutdown, the agreement included some financial relief for older Americans receiving Social Security and Medicare benefits. The bill will prevent large cuts in Social Security disability benefits and reduce the size of increases in monthly premiums and annual Medicare Part B deductibles slated to go into effect next year. Unfortunately, the new budget will also affect retirement planning as it closes the door on two strategies that gave some dual-earner couples the potential to receive higher lifetime benefits. The budget deal ends the popular “file-and-suspend” provision as well as the restricted spousal benefit option that became known as “claim now and claim more later.” The Obama administration has been trying to eliminate these provisions for several years based on the argument they primarily benefited affluent couples.
Social Security Disability Funding
The budget deal includes a provision that protects the Social Security disability fund, which was scheduled to run out of money next year, until 2022. The bill allows the Social Security Administration to pay SSI claims by shifting payroll tax revenues from the general retirement account into the agency’s disability fund. Without the reallocation, individuals receiving disability would have faced a 20 percent cut in their monthly SSI benefits because funds were exhausted. This is not a permanent fix, however, and bears watching, especially for anyone relying on the disability fund as a substantial source of income.
Medicare Part B Relief
The budget authorizes a $7.5 billion loan from the U.S. Treasury to help cover some of the 52 percent hike in premiums for 2016 that almost one-third of Medicare beneficiaries faced.
Medicare Part B covers costs associated with doctor’s visits, medical equipment needs and outpatient services. Approximately 70 percent of Social Security recipients have their Medicare premiums deducted from their monthly benefit check. These seniors were protected by a “hold harmless” requirement that says benefit checks cannot decrease from one year to the next. Since consumer inflation is very low due to falling oil prices, there will be no cost-of-living increase next year. As a result, the benefit amount will remain the same, so these seniors will avoid having to pay the increase in premiums because it would reduce their monthly allotment.
The remaining 30 percent of beneficiaries faced paying the full increase in premium for everyone because they are not protected by the “hold harmless” rule, but the new provisions in the budget deal lower the increase in the insurance premium to 15 percent. The premium will include a $3 fee for repaying the loan. Starting in 2017, all Medicare beneficiaries will pay the $3 fee. That year, the Medicare program will also have to reassess future premiums and steps to repay the loan.
Beginning next year, all Part B beneficiaries will face a 15 percent higher deductible. Those who have Medigap insurance or are enrolled in Medicare Advantage may not be required to pay the increased fee.
Ending Claiming Strategies
Under the file-and-suspend provision, one member of a couple could file for benefits and then suspend them, allowing the unclaimed benefits to grow, while his or her spouse would claim spousal benefits in the meantime. Restricted spousal benefits provided a married individual at age 66 the option to receive only spousal benefits, rather than the full monthly allotment, when filing. This also would allow future benefits to grow. These policies favored those with higher monthly benefits and other sources of retirement income. Beginning next year, if one spouse suspends his or her Social Security benefits, all other benefits related to that account, including spousal income and children’s benefits, will also be suspended.
New Filing Rules
Due to the new rules, those currently receiving benefits under file-and-suspend or the spousal benefits option will continue to do so with no changes. If you elect to change the multistep plan in the future, you may be affected. The agreement contains a six-month grace period for the file-and-suspend option, to enable individuals to make the necessary changes to their retirement plans. Individuals who reach full retirement age and complete the process during the grace period can still qualify. Those not meeting the age or time requirement will no longer be allowed to file and suspend, because that option will be off the table.
Those planning to file a new multistep spousal benefits claim must turn 62 in 2015. The spousal benefit only option will be unavailable to those turning 62 in 2016 or after. These two programs often were used together for maximum benefit growth. This combined strategy will be available only for those individuals who reach their full retirement age and complete the filing process within 180 days of the November 2, 2015, enactment date of the new spending bill.
The Bottom Line
These changes to the Social Security and Medicare programs will affect each person and married couple differently based on their age and current filing status. The loss of certain financial strategies does not change the importance of planning when and how to collect Social Security benefits.
The loss of the spousal benefit as well as the file-and-suspend option may change the amount of income that couples will receive. This may require adjustments in other retirement plans, such as when to receive IRA and pension distributions to fill in the gap created by a decline in expected Social Security benefits in the future. Individuals may also have to work longer or adjust their standard of living. Retirement plans utilizing one or both of these strategies will have to be changed for those not meeting the grace-period age requirements. Couples approaching retirement who were counting on the increased benefits previously allowed under these strategies and who do not have sufficient income from other sources will be the hardest hit by the changes. How you approach these changes will be based entirely on your own unique set of circumstances. The short grace period means that those who still qualify must act quickly if they wish to participate under the current rules before the new guidelines take effect.
Should you have any questions pertaining to your financial situation in 2016 and to adjusting your investment portfolio to address these potential challenges, please call us at (844) 336-9878.