The budget bill Congress recently passed and President Obama signed will wipe out billions in potential future Social Security benefits for millions of members of the baby boom generation. And if you had counted on using certain strategies to increase how much you’ll get from Social Security, you may need to rethink that — soon.
Many financial advisers are now scrambling to rethink their clients’ retirement plans, according to InvestmentNews.
Goodbye to ‘File and Suspend’
One of the strategies that will disappear next year (known as “file and suspend”) has meant an extra $10,000 to $60,000 in Social Security benefits for some married couples age 66 to 70, according to Michael Kitces, a financial planner and director of planning research at Pinnacle Advisory Group in Columbia, Md.
Two other strategies that’ll end: filing a restricted claim of spousal benefits and the ability to collect a lump sum from Social Security between age 66 and 70 if you chose not to claim benefits and then change your mind.
After these changes take effect in six months, no one turning 62 in 2016 or later will be able to take advantage of these claiming strategies.
The Obama administration called for the end of "file and suspend" by saying it gave upper-income retirees a chance to game the system.
Here’s how the Social Security claiming rules will change and also how Congress just reduced 2016’s scheduled 52 percent Medicare premium increase for certain beneficiaries:
How File and Suspend Works
Under current law, at age 66, you can collect full Social Security benefits or you can instead “file and suspend,” which means you sign up for benefits but don’t actually take them. Rather, your unclaimed benefits will grow at the rate of 8 percent a year (through what are called “delayed retirement credits”) and you can do this until you hit age 70. Meantime, your spouse can immediately begin collecting half of your check starting at age 66. (Divorced people can use the strategy if they were married for 10 years and are now single.)
But this file and suspend claiming technique won’t be allowed starting in six months.
Here’s an example of how file and suspend works today:
John is entitled to $2,000 a month from Social Security at 66 and files and suspends. His wife, Joan, also 66, did not have enough years of earnings to get her own Social Security benefit, so she takes the spousal benefit, equal to 50 percent of John’s when he files and suspends. Joan collects $1,000 a month until 70, giving her a total of $48,000 over the four years. At 70, John begins collecting his benefit of $2,640 a month. The strategy gives Joan and John a combined Social Security income of $3,640 a month when they are 70; it will be worth more in the future because annual cost-of-living increases will compound over the years.
About 100,000 couples now file and suspend and the number had been expected to double over the next decade, according to the Social Security Administration.
The “restricted application” strategy allowed one spouse to file just for spousal benefits at Full Retirement Age and then let his or her own retirement benefit continue growing. Jim Blankenship, author of A Social Security Owner’s Manual, told MarketWatch that divorced people “will be the big losers” due to this change.
Social Security Advice for Couples
Kitces’ advice for couples and ex-spouses who are 66 or older now or who’ll be 66 in the first half of 2016 before the new rules kick in: Take a close look at your potential benefits and decide whether it makes sense to file and suspend approach. (You can read more from Kitces on the subject at his Nerd’s Eye View blog.)
David Leland, a managing director of Merrill Lynch in Beverly, Mass., says: don’t panic. “I see no incentive to have people rush [to file and suspend],” Leland says.
Just bear in mind that, in the future, spouses will have this choice of benefits when applying for Social Security: they can get the larger of either their own benefit or the spousal benefit. Any benefit they choose, they “are stuck with,” said Leland.
The reforms in this bill are projected to save Social Security $168 billion over 75 years, according to Senate Majority Leader Mitch McConnell (R-Ky.) The Obama administration originally called for the end of file and suspend in its 2014 budget, saying it gave upper-income retirees a chance to game the system.
Who Will Be Hurt by The New Law
But this view is disputed. “Many wealthy couples utilize the file and suspend strategy and it’s understandable that there are those who would like to see [the end of it] in the context of a budget bill,” said Shirley Whitenack, president of the National Academy of Elder Law Attorneys. “File and suspend strategies, however, also are used by lower-middle-class families with disabled children. It is unfortunate that parents of children with special needs have to engage in creative planning techniques to support their families.”
Women with low- and moderate incomes also are important beneficiaries of the strategy, said one member of the advocacy community (she declined to be identified publicly since other groups active on Social Security issues, such as AARP, have been vocal supporters of the bill). “It’s sad to see women being thrown under the bus,” she said, speaking about the impending law change.
“We fully support the Social Security provisions of this agreement,” said Christina Martin-Firvida, AARP’s director of financial security and consumer affairs. AARP endorses the bill partly because the law will also help keep afloat the Social Security disability benefits trust fund. Otherwise, disability checks could have been cut by 20 percent in December 2016.
“This bill ensures that disabled workers and their families continue to receive all of their Social Security benefits for the next seven years without cutting any benefits for anyone receiving retirement benefits today,” Martin-Firvida said.
The End to the Lump Sum From Social Security
Web Phillips, a senior policy analyst with the National Committee to Preserve Social Security and Medicare (NCPSSM), says the end of the lump sum Social Security benefit for people with a major life change between age 66 and 70 is another “good deal that goes away” next year.
For example, under current law, someone who finds out he has a terminal illness at 68 can collect a lump sum Social Security check for the benefits he suspended during the past two years. Under the new law, this won’t be allowed; he could begin getting retirement checks immediately, but he won’t get a check for back payments.
“We have to focus on the big picture, because all of these components are part of a larger deal on the budget,” said Dan Adcock, director of policy and government relations at the NCPSSM.
What Will Happen to Medicare Premiums
The budget deal also averts that big jump in Medicare Part B premiums (which cover doctor bills) that Next Avenue wrote about recently.
The Part B payment for all those who’ll turn 65 next year and join the program, as well as some upper-income people (incomes over $85,000 or $170,000 for married couples filing jointly) and poor people whose premiums are paid by state governments, would have risen to $159 a month. Instead, it will be increase 15 percent to $123 a month ($120 plus a $3 surcharge); the planned 52 percent increase will be averted by using money borrowed from the government’s general revenues. Higher-income beneficiaries will likely owe premiums of $168 to $384 plus the surcharge, according to USA Today.
Similar, the annual Part B deductible — the amount in doctor bills you have to pay each year before full coverage begins — will increase to $167, from $147 this year. This will avoid the planned deductible boost to $223.
For most Medicare beneficiaries, the Part B premium in 2016 will be unchanged, at $104.90 a month, and the deductible will stay at $147.