Impact on Social Security, Medicare, and Disability Insurance
By Norm Miller, Senior Wealth Counselor at Versant Capital Management, Inc.
On Monday, November 2nd President Obama signed the Bipartisan Budget Act of 2015 into law, which suspends the debt limit until March 2017. This legislation included provisions addressing entitlement programs and the elimination of two Social Security claiming strategies that can increase lifetime benefits for married couples.
Social Security Claiming Strategies
The Senior Citizens Freedom to Work Act in 2000 introduced the provision of voluntary suspension of Social Security benefits, thereby eliminating earnings test and providing delayed retirement credits at the rate of 8% per year. The intention of this law was to allow seniors to continue to work and still collect Social Security (SS) benefits. The 2000 legislation spawned two claiming strategies: File and Suspend and Restricted Applications. Congress decided that the use of these new claiming strategies created perceived loopholes and the 2015 legislation will close them. The Center for Retirement Research estimated in 2009 that the restricted application strategy would cost up to $9.5 billion per year if everyone eligible implemented the strategy. The actual utilization of these strategies is far less than the maximum and the Social Security Administration estimates that elimination of the strategies will save around 0.02 percent over the next 75 years, which is a small fraction of the long-term deficit of 2.65 percent.
The File and Suspend Strategy
To better understand the impact of the new law, it’s important to understand how the two strategies currently work. The File and Suspend strategy allows a person to file for his/her Social Security benefit and then immediately suspend it, allowing his/her benefit to grow via delayed retirement credits (8 percent per year). This then allows for the spouse to claim a spousal benefit on his/her spouse’s work credit. The spousal benefit is 50 percent of the primary beneficiaries full retirement benefit. For example, let’s say the husband is age 66 in 2015 (full retirement age per Social Security rules) and has a full retirement age (FRA) benefit of $2,000. The wife is age 65 in 2015 and has a FRA benefit of $500 on her own record. The wife may file for a benefit, and since she is less than FRA, she is deemed to file for both her own and spousal benefit at the same time. The Social Security Administration (SSA) will then give her the higher of the two benefits; namely the $1,000 spousal (discounted slightly since it is taken prior to FRA), which is 50 percent of his FRA benefit. The File and Suspend strategy allows the lower earning spouse to collect a higher spousal benefit. In addition, the higher earning spouse may delay benefit until age 70, which increases his monthly benefit from $2,000 to $2,640 – a 32 percent increase. This spousal strategy is intended to maximize the lifetime benefits for the couple.
The Restricted Application, or “Claim Now, Claim More Later”
The Restricted Application is sometimes referred to as the “Claim Now, Claim More Later” strategy. To illustrate, let’s say the husband is age 66 and has a monthly FRA benefit of $2,500 and his wife, who is also age 66, has a FRA benefit of $2,000. The optimal claiming strategy to maximize lifetime benefits is for the husband to File and Suspend and for the wife to file a Restricted Application. A restricted application may be only filed at FRA or later, since deemed rules do not apply. Thus, the wife is allowed to file for a spousal benefit only, which will be $1,250 (50 percent of his $2,500). The wife can then collect $15,000 per year (plus cost of living adjustments along the way) and then file on her own record at age 70, getting a monthly benefit of $2,640 ($2,000 plus 32 percent of delayed retirement credits). The husband, who suspended his benefit, will then file at age 70 and get a monthly benefit of $3,300 ($2,500 plus 32 percent of delayed retirement credits). This is a powerful strategy for married couples that allows for maximization of SS benefits, including allowing for the lower earning spouse to collect spousal benefits first, and then switch to a benefit on his/her own record.
What Does the New Legislation Mean?
The 2015 legislation effectively kills the File and Suspend strategy, since the new provision is that when one files and suspends, they not only suspend their own benefit, but all other benefits on his/her own record. As you may recall, the primary purpose for the File and Suspend strategy is to allow a spouse to claim a spousal benefit.
The new rules for File and Suspend become effective on April 30, 2016. Congress has allowed a six month transition period — a planning window for a small segment of the senior population. The Restricted Application provides for more temporal flexibility since it is not eliminated for persons born in 1953 or earlier. That is, if you are age 62 or older in 2015, you may still utilize the Restricted Application when you hit FRA of 66. Therefore, restricted applications will be permissible through 2019 via the grandfathering provision. To qualify for a restricted application benefit, your spouse must have filed, or filed and suspended.
There are other nuances to the new law that will not be addressed here, such as the impact on divorced spouses. We strongly recommend that conversations with your financial advisor regarding Social Security claiming strategies be addressed before the April 30, 2016 File and Suspend deadline for those affected. A helpful summary for navigating the date deadlines is:
- If you were born on April 30, 1950 or earlier you may still utilize File and Suspend strategy, but the deadline date to use this strategy is April 30, 2016.
- If you were born in 1953 or earlier, you may still utilize the Restricted Application strategy.
- If you were born in 1954 or later, you fall completely under the new rules and you have no ability to utilize the previous claiming strategies.
Medicare Part B Premium
In a previous article, the “Hold Harmless” provisions were discussed that described how the approximate 30 percent of Medicare beneficiaries not held harmless would have to foot the bill for increased Medicare Part B premium costs for all beneficiaries. The Part B premium increase was estimated to be 52 percent. The Bipartisan Budget Act of 2015 mitigates this 2016 Medicare Part B increase. The 2015 standard Part B monthly premium was $104.90. The 2016 standard premium was projected to be $159.30 for the not held harmless group. The new legislation sets the 2016 basic premium at $120 for the not held harmless group (for example, people who apply for Medicare in 2016 and are below the income threshold for means testing). The $120 was arrived at as the amount of the increase if it were applied across all beneficiaries.
In order to finance this “fix” to cover the $12 billion of higher health care costs, a loan will be made from the Treasury Department to the Supplemental Medical Insurance Trust Fund. This loan will be repaid by beneficiaries not subject to hold harmless at the rate of $3 per month of additional premium until the loan is paid in full. So, for standard premium beneficiaries not subject to held harmless, the 2016 monthly premium will be $123 ($120 standard plus $3 loan repayment). This “actuarially fair rate” provision stays in effect in 2017.
Social Security Disability Insurance
The Disability Insurance Trust Fund becomes exhausted by the end of 2016. This means that the approximately 9 million people on Social Security disability would face benefit cuts in 2017 and on. The Bipartisan Budget Act of 2015 provides a temporary band-aid to this problem. OASDI (Old-Age and Survivors Insurance, and Disability Insurance) is taxed at 12.4 percent of earned income (one-half employee and one-half employer). The OASI portion is 10.6 percent and the disability portion is 1.8 percent. The new legislation reallocates 0.57 percent to the Disability Insurance (DI) trust fund (for a total of 2.37 percent) for the years of 2016 through 2108. Congress expects this to keep the DI Trust Fund solvent until 2022, which extends it by six years. This is not a long-term fix and also has the effect of making the OASI Trust Fund less viable. Current projections are that OASI Trust Fund will be exhausted in 2034. The reallocation to DI Trust Fund will shorten that.
It seems clear that Congress took a politically palatable short-term approach in this legislation. Entitlement reform is still badly needed for long-term sustainability, but the solutions may become more draconian as time passes.
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