Marshall Elder and Estate Planning Blog: November 2015

Monday, November 2, 2015

New Budget Law Changes to Medicare and Social Security

The recently passed “Bipartisan Budget Act of 2015” raises the debt ceiling and avoids a costly government default until 2017. It also includes several provisions that will impact Medicare and Social Security. This article addresses those impacts.

Medicare Part B Premiums and Deductibles Adjusted

The Budget Act reduces a huge increase in Medicare Part B premiums and deductibles that would have hit 30% of Medicare beneficiaries on January 1. This diverse group includes people who do not collect Social Security, or who will be enrolling in Medicare’s Part B for the first time in 2016, or have higher incomes, or are poor enough that they also qualify for Medicaid.

Under existing law the remaining 70% of beneficiaries are “held harmless” from a premium increase. [See my previous article on this subject - Medicare Premium May Jump 52% for Millions of Seniors.]

The unlucky 30% were facing an increase of more than 50 percent in their standard monthly Part B premiums. And all Medicare beneficiaries were going to see their annual Part B deductible go from $147 to $223.

Instead, the Budget Act will raise premiums about 15% for the unlucky 30% who are not held harmless. This puts their base premium at $120 a month, although higher income individuals will pay much more. The other 70% of Medicare recipients will see no premium increase.

The annual Part B deductible will increase to about $167 for all Medicare beneficiaries (rather than $223).

So there will still be cost increases for Medicare beneficiaries in 2016, but they will be much smaller than would have occurred without the new Budget law.

Social Security Disability Cuts Averted

The Social Security Disability trust fund was going to run so low on money by the last quarter of 2016 that disability benefits would have been automatically cut by an estimated 19 percent. The cuts would have hit nearly nine million disabled workers and over 1.7 million children who receive Social Security disability benefits.

The Budget Act provides temporary relief. The new law props up the Disability trust fund by shifting $124 billon in payroll taxes to it from the separate trust fund that covers benefits for retired workers. This should give the disability fund enough additional financial support to allow it to continue paying full disability benefits until 2022.

Social Security “Loopholes” Closed

The new law will end two techniques that married couples use to maximize their Social Security benefits: (1) file-and-suspend and (2) filing for a restricted claim of spousal benefits. (In general, widows and widowers are not affected by these changes).

These claiming techniques have made it possible for many couples to obtain spousal benefits while continuing to accrue delayed retirement credits.

File and Suspend

Your spouse cannot claim a spousal benefit based on your work record unless you have already applied for your own benefit. But current Social Security rules permit workers who reach their full retirement age to apply for and then put off (suspend) receiving their benefit payment for up to 4 years (until age 70). By filing you allow your spouse to receive his or her spousal benefits based on your earning record. By suspending, you get to increase your own eventual payouts at the rate of 8% a year by earning delayed retirement credits.

I explained how this all works in a prior blog post: File and Suspend to help Maximize Social Security Benefits.

Basically, the strategy allows married couples the opportunity to gain up to 4 years of spousal benefits. This can amount to many tens of thousands of dollars. And the eventual increased entitlement that results from earning delayed retirement credits can help with longevity risk and provide additional financial security for a surviving spouse.

The file and suspend technique is eliminated by the new Budget law. Under Section 831(b) of the Act the worker will have to actually be receiving payments for spousal benefits to be available. A worker will still be able to suspend to claim delayed retirement credits, but spousal benefits will not be paid during the suspension period.

The elimination of file and suspend will take effect 180 days after enactment (the date the law is signed by the President). [Update: the President signed the Budget Act into law on November 2, 2015. 180 days from then is April 30, 2016.] People whose requests for benefit suspension were submitted prior to that time will not be affected. See Section 831(b)(3) of the Act. This means that workers who become 66 within the first 180 after the enactment date should still be able to file and suspend their Social Security benefits during that time and thereby trigger benefits for their spouse. The rules change for workers applying thereafter.

Filing for a Restricted Claim of Spousal Benefits

People are often eligible to earn Social Security benefits through more than one pathway. Many married workers are eligible to receive a retirement benefit based on their own work record, and a spousal benefit based on the work record of their spouse.

Until now, a worker reaching full retirement age could file a “restricted application” requesting only their spousal benefit. This allowed the worker to receive Social Security payments while continuing to earn delayed credits on their own record. At 70 they could switch to enhanced payments based on their own record.

The Act does away with this strategy by presuming that a worker’s application for spousal benefits is also an application for benefits on the worker’s own record. You can get the higher benefit, but not both. You are limited to one bite of the apple.

The elimination of the restricted claim claiming strategy applies to anyone who attains age 62 after the 2015 calendar year. See Section 831(a)(3) of the Act.

The Budget law also increases the penalties for Social Security fraud.

Unfortunately, the bill doesn’t really address the long term funding problems faced by the Medicare and Social Security programs. The current toxic atmosphere in Washington does not bode well for finding longer term solutions.

Once the bill is signed into law by President Obama, Congressional Appropriations Committees will begin work on an omnibus bill that will determine how the budgeted funds will be spent.