The Bipartisan Budget Act of 2015, signed into law on November 2, 2015, ensures federal government funding through the fiscal year 2017, primarily by suspending forced across-the-board spending cuts called “sequesters,” which were triggered when lawmakers failed to reach a budget agreement in 2011. Among a variety of other provisions, the law limits Medicare premium increases for 2016. In the biggest surprise, it eliminates two potentially lucrative Social Security claiming strategies.
Mitigating Medicare Increases
Before the bipartisan budget’s passage, about 30% of Medicare beneficiaries faced Part B (medical insurance) premium increases of 52% due to rising medical costs and a “hold harmless” provision in the Social Security Act that prevented increases for the other 70% of beneficiaries because there was no Social Security cost-of-living adjustment (COLA) for 2016 (1).
The legislation authorizes borrowing from the General Fund to limit the standard Part B premium to what it would be if spread among all beneficiaries. The monthly Part B premium will remain at $104.90 for those protected by the hold-harmless provision and will increase to $121.80, as opposed to a projected $159.30, for four groups:
(1) Part B enrollees who have not yet filed for Social Security benefits.
(2) Those who enrolled in Part B for the first time in 2016.
(3) Lower-income beneficiaries whose premiums are paid by Medicaid.
(4) Higher-income beneficiaries who also pay an income-based surcharge (2).
A $3 monthly surcharge built into the higher standard premium will help repay the loan from the General Fund.3 The law authorizes a premium subsidy in 2017 if there is no COLA but has no provisions for future years.
A section of the bipartisan budget titled “Closure of Unintended Loopholes” ends Social Security claiming strategies that may have been unintended consequences of the Senior Citizens Freedom to Work Act of 2000. Closing these loopholes is projected to reduce the Social Security actuarial deficit (4) slightly. Depending on your age, you might still be able to take advantage of certain expiring claiming options. The changes should not affect current Social Security beneficiaries and do not apply to survivor benefits.
File & Suspend
Under the previous rules, an individual who had reached full retirement age could file for retired worker benefits to allow a spouse or dependent child to file for a spousal or dependent benefit. The individual could then suspend his or her worker benefit to accrue delayed retirement credits and claim an increased worker benefit later, up to age 70. For some couples and families, this strategy increased their total lifetime combined benefits.
Under the new rules, effective April 30, 2016 (or later if the Social Security Administration provides additional guidance), no benefits can be paid while the worker’s benefit is suspended. Thus, a spouse (and potentially an ex-spouse) and a dependent child can receive spousal or dependent benefits only when the primary beneficiary receives worker benefits, effectively ending the file-and-suspend strategy for couples and families. This also means that a worker can no longer suspend benefits and request a lump-sum payment for the period during which benefits were suspended. This option was helpful to beneficiaries who faced a change of circumstances, such as a severe illness.
The option to file and suspend after reaching full retirement age is still available as long as no benefits are paid to anyone during the suspension. So someone who claims worker benefits could decide to suspend future benefits upon reaching full retirement age (e.g., because they went back to work) and restart them later at a higher amount.
TIP: If you are 66 or older before the new rules become effective, you can still take advantage of the combined file-and-suspend and spousal/dependent filing strategy.
Under the previous rules, a married person who had reached full retirement age could file a “restricted application” for spousal benefits after the other spouse had filed for Social Security worker benefits. This allowed the individual to collect spousal benefits while accruing delayed retirement credits on their work record. In combination with the file-and-suspend option, this enabled both spouses to earn delayed retirement credits. In contrast, one spouse received a spousal benefit, a type of “double-dipping” that was not intended by the original legislation.
Under the bipartisan budget, anyone born in 1954 or later will be deemed to be filing for any benefits to which they are entitled — a spousal benefit or a worker benefit, whichever is higher. They will not be able to change from one benefit to another at a later date.
TIP: If you were born in 1953 or earlier, you could still file a restricted application for a spousal benefit once you reach full retirement age.
Basic options for claiming Social Security remain unchanged. You can file for a permanently reduced benefit starting at age 62, receive your full benefit at full retirement age, or earn delayed retirement credits by waiting to file up to age 70. Although the changes are relatively small, the bipartisan budget may open the door to much-needed legislative action on Social Security and Medicare.