By Bleckley Dobbs, , CFP®
By now, you’ve probably heard about changes to a couple of the rules governing the claiming of Social Security benefits. These were “buried” in the recent two-year budget bill passed by both houses of the U.S. Congress and signed into law by President Obama on November 2, 2015. In this same law are provisions that will soften the impact of premium increases for certain Medicare enrollees.
These changes illustrate that the future is uncertain and that constant reassessment of planning assumptions is critical. Let’s look in more detail at the Social Security and Medicare changes – what they are, whom they affect and what, if anything, you should do about them.
New Rules for Claiming Social Security
President Obama has been talking for several years about the need to eliminate certain “abusive” strategies that some seniors, especially higher-income married couples, have been using to exploit “loopholes” when claiming Social Security benefits. These “loopholes” were signed into law by President Clinton as part of the 2000 Senior Citizens Freedom to Work Act, which was intended to increase the flexibility of seniors to continue to work also while collecting Social Security benefits.
This month’s law affects two Social Security rules:
Filing and suspending benefits:
- What this means: A worker must first file for Social Security benefits in order for a spouse or dependent to receive benefits based on the worker’s record. Until this law was signed, a worker who had reached Full Retirement Age (or FRA, which is age 66 for current retirees), could “file and suspend” his or her own benefits. Filing allowed the worker’s spouse or eligible dependent to file for benefits on the worker’s record. Suspending allowed the worker to delay collecting his own benefit and instead to let it to grow at 8%/year up to age 70. Another (previous) advantage of filing and suspending was that at any time after filing, the worker could request the payment of all suspended benefits as a lump sum and then start receiving a monthly benefit based on the original filing age. This was advantageous for workers whose life expectancy was reduced after the initial filing but before receiving monthly benefits.
- What has changed: The new law prohibits a worker from suspending benefits when filing. Now the worker must start receiving benefits in order for a spouse or dependent to receive a monthly benefit on the worker’s record. Also a worker can to longer request a lump sum payment of suspended benefits.
- Who is affected: The law goes into effect on (about) May 1, 2016. Anyone who turns 66 prior to that date and is not yet collecting Social Security benefits who wants to be able to file and suspend should do so before that date. No one may suspend benefits after May 1, 2016.
- Importantly, if you or your spouse turns 66 by May 1, 2016, and you have not yet filed for benefits, now is the time to consult a good advisor.
Filing a “restricted application” for benefits:
- What this means: Previously, a person who had reached FRA was allowed to file for Social Security benefits and “restrict” that application to a spousal a benefit only, thus allowing the person’s own worker’s benefit to grow by 8% per year until age 70. At age 70, the person could then change over to his or her own higher benefit.
- What has changed: With the new law, when a person who has reached FRA files for Social Security benefits, that person is deemed to have filed for all benefits for which he or she is eligible. The Social Security Administration will determine the highest benefit and pay that amount. This means the person’s own worker’s benefit would not continue to grow by 8%/year. This rule has always been in place for anyone filing for benefits before reaching FRA.
- Who is affected: Anyone born on January 2, 1954 or later, who is eligible for benefits based on the record of a current or previous
- Again, importantly, anyone who turns 62 by January 1, 2016 can still file and suspend and should consult an advisor to determine the best strategy for her particular situation.
Changes to Medicare Premiums for Certain Enrollees
In October, the Social Security Administration announced that, because the inflation rate (CPI-U) for the past 12 months was negative, current recipients would not receive a cost of living adjustment (COLA) to their benefits on 2016. Due to the “hold harmless” provision in Social Security law, which prevents the net Social Security payment for most recipients from decreasing from one year to the next, this means Medicare Part B premiums for those already receiving Social Security benefits and paying the lowest Part B premiums of $104.90/month, will not see a premium increase in 2016. However, the law also states that the amount collected in Part B premiums must cover a certain portion of the program’s total costs. When the little Medicare cost gnomes in Washington put all the data and rules in their fancy computers, they determined that, for anyone not protected by the hold harmless provision (about 30% of all people receiving Part B benefits), premiums would need to increase 52% from 2015 to 2016.
Understandably, Congress was worried at the prospect of millions of people on Medicare (a high percentage of whom actually vote) seeing a 52% increase in Part B premiums in January. While they couldn’t find the money from another source to completely eliminate the premium increase, they did come up with a way to mitigate the impact on those affected. It involves reducing the premium increases for those affected, but adding on a “surcharge” that will repay the money the Medicare program must borrow from general government revenues to allow a reduction in the premium increases. This change was also part of the new budget law mentioned above. The following table shows the effect of these changes.
Medicare Part B Premiums (Based on Yearly Income from Two Years Prior)
File Individual Tax Return
File Joint Tax Return
|2015 Monthly Premium||2016 Monthly Premium|
|Income up to $85,000 and already receiving Social Security||Income up to $170,000 and already receiving Social Security||$104.90||$104.90|
|Income up to $85,000 and not yet receiving Social Security||Income up to $170,000 and not yet receiving Social Security||$104.90||$121.80*|
|Income above $85,000 up to $107,000||Income above $170,000 up to $214,000||$146.90||$170.50*|
|Income above $107,000 up to $160,000||Income above $214,000 up to $320,000||$209.80||$243.60*|
|Income above $160,000 up to $214,000||Income above $320,000 up to $428,000||$272.70||$316.70*|
|Income above $214,000||Income above $428,000||$335.70||$389.80*|
* Includes monthly surcharge to repay money borrowed by Medicare program from general government revenues.
These changes illustrate an important point: The future is uncertain. Laws are constantly changing – in fact we are still monitoring tax laws that could change before the end of this year.
Social Security and Medicare are still not stable over the long run. We must be prepared for more changes to shore up the funding of both programs. Nobody knows what those changes will be exactly, but we will keep track of the situation and will be happy to work with clients who are affected now and in the future.
Many other things will change in the future – we don’t know how or when. Flexibility is crucial. That’s why ongoing planning, not a static “plan”, are important to long term success. We are here to help our clients through all the unknown and unknowable things that will happen in the future.