In the dark of night and in the nick of time, Congress passed and President Barack Obama later signed into law the Bipartisan Budget Act of 2015, avoiding a shutdown and funding the government for two more years. Included in the budget was a senior surprise — the elimination of two potentially lucrative Social Security claiming strategies.
Social Security, once an under appreciated retirement asset, in recent years has gained new respect as an important tool in retirement planning, one that could provide higher income in various situations by managing its timing. As these claiming strategies became more well-known and more retirees took advantage of them, the costs to an already strained program became too great to be ignored, and therefore had to be eliminated.
The strategies at issue are “file and suspend” and “restricted application.”
In the Social Security system, a married person receives a benefit payment based either on his or her own earning record or half of the other’s, whichever is higher. The longer the claimant waits to receive his benefit, the more the monthly benefit amount grows, at about 8 percent per year, to a maximum at age 70.
But for Spouse #1 (wife for this exercise) to claim under Spouse #2’s (husband’s) record, her husband must already have filed to receive benefits. With file and suspend, the husband can file at his full retirement age, which would allow his wife to claim half of his benefit, and immediately suspend his payments to allow them to grow until age 70. Under the new law, if a benefit is suspended, no one can then claim based on that person’s record.
Letting benefits grow
So the husband in this example can still let his benefits grow to age 70, but his wife will not be able to collect half of his benefit until he actually takes his.
Notably she can still take her own benefit at that point, and switch over to her husband’s when he does file. Despite the original language of the bill (that was subsequently clarified) couples who have claimed this way already will not have their benefits affected, and there is still a small window open for new claimants, but you must file by April 30, 2016 and only those age 66 and older are eligible.
Restricted applications were also eliminated in the deal, but with a longer grace period.
With a restricted application, Spouse 2 (husband) has the ability to only take half of Spouse 1’s (wife’s) benefit, even though his benefit will be higher. This allows his benefit to continue to grow until age 70, but with the bonus of receiving at least a smaller benefit in the meantime.
Eliminating file and suspend
Again, with the elimination of file and suspend, the wife must already be receiving her benefit in order for her husband to claim his half. For those who are age 62 or older by the end of this year, the restricted application option will be available at age 66, but for anyone younger than 62, this will not be an option. This does not affect claimants currently receiving benefits in this manner.
An unmarried divorced person is also subject to the same rules. In the past, he or she could claim only spousal benefits and switch to his or her own later, but that is no longer available, unless both the claimant and former spouse are at least age 62 by year end 2015.
However, widows and widowers (including those divorced from the deceased spouse) will still be able to choose a survivor benefit based on the spouse’s record, and switch to his or her own later.
Only 30 percent affected
In other news in the budget deal, the anticipated 52 percent Medicare Part B premium increase was held to 16 percent, going from a base price of $104.90 per month to $121.80. Interestingly, that premium increase only applies to about 30percent of Medicare participants. Due to the “hold harmless” clause, most people having Medicare premiums withheld from Social Security payments cannot receive a premium increase greater than the cost of living adjustment on Social Security.
And since that cost of living increase is expected to be 0 percent for 2016, then those recipients cannot be subject to the premium increase.
I say most and not all, because those recipients subject to an income related adjustment amount (that premium surcharge due to having a modified adjusted gross income of more than $85,000 for individuals and $170,000 for couples) still will see the increase, as will folks enrolling in Medicare B for the first time in 2016. Others making up the lucky 30 percent include those who delayed claiming Social Security and so pay their Medicare premiums directly.
And since the reduction in the premium increase from 52 percent to 16 percent is being paid for by a loan from the Treasury, Medicare beneficiaries will be required to pay a $3 a month surcharge for several years to help cover the costs. For the time being that surcharge will only be assessed to those also subject to the premium increase.
Clearly averting a steep premium increase by borrowing money is not a long term strategy, and losing the ability to manage Social Security benefits to stretch them, especially for those who have planned based on it being available, is unfortunate. But maybe, just maybe, our leaders are finally waking up to the reality that something needs to be done now to fix both Medicare and Social Security, and will have the guts to do it.