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By Jeffrey Levine, IRA Technical Expert
UPDATE: This article was updated on Tuesday, November 3 to reflect the President signing the Bipartisan Budget Act of 2015 into law.
Retirement planning for millions of Americans just changed dramatically. Last night (Monday, November 2), President Obama signed into law the Bipartisan Budget Act of 2015, which has a significant impact on both Medicare Part B participants and those trying to employ savvy planning tactics to get the most of their Social Security benefits. Here’s what you need to know.
The File-and-Suspend Strategy is Being EliminatedUnder the current rules, once you reach your full retirement age, or FRA for short, you are able to file for your Social Security benefits, but request that such benefit not actually be paid. What may seem like a bunch of meaningless paperwork – after all, what’s the point of filing if you’re not actually going to get something – can, in fact, serve a variety of important purposes. Most notably, once you have filed for your own benefit, it allows certain other family members – most commonly a spouse – to claim a benefit using your earnings record.
Note that it’s not the act of receiving benefits that allows another person to claim benefits based on your earnings record. It’s the act of filing. That’s a key difference. Under the current rules, if you’ve reached your FRA and have filed for your benefit, you may voluntarily choose to suspend that benefit. By doing so, you can receive what are known as delayed credits, which increase your own Social Security benefit by 8% per year, not counting any cost-of-living adjustments that may also be added. By using the file-and-suspend strategy, you can both allow other family members to claim a benefit based on your earnings record, while at the same time allow your own benefit to continue to compound and grow. But all of that has just changed for millions of Americans.
As part of the Bipartisan Budget Act of 2015, the file-and-suspend strategy is being eliminated, effective for suspension requests submitted 180 days after the signing of the act and beyond. After that time, instead of family members being allowed to receive a benefit based on your earnings record after you’ve merely filed, the law makes it necessary for you to actually be receiving benefits for them to do so. So, if you were planning to use the file-and-suspend strategy as part of your planning, but your FRA is after the 180-day window, you’re out of luck and will be faced with a more difficult choice when it comes time to make your Social Security claiming decisions. On one hand, you could hold off on receiving your own benefit until as late as age 70. That would make your benefit as large as possible, but would prevent other family members from receiving benefits based on your earnings until that time. On the other hand, you could begin receiving benefits sooner. That would reduce your benefit, but would also allow other eligible family members to claim a benefit based on your earnings record sooner.
The Restricted Application Strategy Is Being EliminatedThere are many situations in which you may be eligible to receive more than one benefit provided by Social Security. For instance, you may be eligible to receive a retirement benefit based on your own earnings record and a spousal benefit based on the earnings record of your husband or wife. Under the current rules, once you reach your FRA, you can file what’s known as a restricted application. By filing a restricted application, you are essentially telling Social Security “pay me only my spousal Social Security benefit, not my own retirement benefit.” By utilizing this approach, you can receive at least some Social Security benefits, while still allowing your own retirement benefit to earn delayed credits until as late as age 70. At that time, you could switch over to your own, higher benefit. But all of that has just changed for millions of Americans.
Thanks to the Bipartisan Budget Act of 2015, the restricted application strategy is on its way out the door. The Act calls for an expansion of an existing Social Security rule known as deeming. While you will be grandfathered into the old rules if you turn age 62 by the end of 2015 (technically, if you turn 62 on January 1, 2016, you will also qualify thanks to a quirk in the Social Security rules), if you turn age 62 afterwards, you will be deemed to be simultaneously applying for both your retirement and spousal benefit (this is actually how it currently works for those filing prior to their FRA) when you apply, regardless of the benefit for which you’re actually applying. Thus, you would not be able to file solely for your spousal benefits while allowing your own benefit to continue to compound and grow. Instead, you would be forced to either wait until as late as age 70 to receive a higher benefit, but receive nothing in the interim, or you could begin receiving smaller benefits sooner. Neither option is as attractive as the restricted application strategy available today.
High-Income Medicare Part B Participants Will Get Some ReliefMost people enrolled in Medicare Part A receive that coverage at no cost (at least not in the form of premiums). Medicare Part B coverage, on the other hand, generally comes with a price. Most Medicare Part B participants currently pay monthly premiums of $104.90, deducted directly from their monthly Social Security benefits. In fact, that population represents about 70% of all Medicare Part B participants. So why is that important?
Well, under a Social Security rule known as the hold harmless provision, those participants cannot see a drop in their Social Security checks from one year to the next. Thus, if there is no cost-of-living increase for their Social Security checks from one year to the next, there is no way to increase their Medicare Part B premiums. And guess what? There is no cost-of-living increase for Social Security checks for 2016! So Medicare Part B premiums for those individuals cannot increase next year.
But Medicare has to get its money from somewhere, right? Right. So where does that money come from? The answer, unfortunately, is the other 30% of Medicare Part B participants – or at least that’s the way it was going to be. Prior to the passage of the Bipartisan Budget Act of 2015, the “unlucky 30%” were going to be stuck plugging the shortfall in Part B premium payments. That was going to lead to projected increases of upwards of 50% for those individuals. Ouch! But all of that has just changed.
As per the Bipartisan Budget Act of 2015, the U. S. Treasury will loan billions of dollars to Medicare to help meet expenses and reduce the increase in Part B premiums that many would have otherwise faced. Premiums will still go up for those individuals, but only by about a third as much as had previously been expected. Of course, the Treasury’s loan to Medicare will have to be paid back, and those payments, at least initially, are expected to come from the same group of Medicare Part B participants.
What Now?There was very little warning that the file-and-suspend and restricted application strategies were going to be put up on the chopping block as quickly as they were. Plus, while those already using the strategies are grandfathered into the old rules, the window for others to take advantage of the same breaks is extremely short. To put it into perspective, in 1983 a law was passed that raised the FRA to age 67 for those born in 1960 or later. Thirty-plus years later, those individuals still aren’t old enough to feel the impact of that change. In contrast, some families that were counting on using the advanced claiming strategies detailed above to help fund their retirement could be out of luck by as early as next May.
So what if you are one of those people? What should you do now? Here’s a quick action plan for you.
- Revise Social Security projections and retirement plans to account for any difference in benefits you had planned to receive versus what you are now likely to receive.
- Figure out where you will be able to make up the shortfall in your expected income. Will you have enough assets to make up the difference? Will you have to work longer? Spend less?
- Make sure that you are aware of the different effective dates. If you’re lucky enough to still be eligible to use one or both of the Social Security strategies discussed above, make sure you carefully analyze their potential benefits.
- Remember that Social Security is longevity insurance. Although you may now be more tempted to claim your own benefit earlier – if you can’t at least get something from Social Security while you wait – remember to take the long view. One of the biggest concerns Baby Boomers have is, “I don’t want to run out of money.” Delaying receiving your Social Security benefits to as late as age 70 can greatly assist in achieving that goal by providing a guaranteed, inflation-adjusted and tax-efficient pension for life (and perhaps, the life of a spouse too).
What’s Next to Go?No one knows what the future holds, but getting rid of the file-and-suspend and restricted application strategies - what both President Obama and the Bipartisan Budget Act of 2015 have referred to as ‘loopholes’ – were included as part of the President’s proposed budget earlier this year. If further compromises are required, it’s possible the President may get his way on other retirement-related issues as well, particularly for those items that are viewed as loopholes. Earlier this year, we outlined 14 retirement account-related provisions included in the President’s proposed budget. You can read about them here . Will any of them be next? We’ll just have to wait and see.