What’s Up With Medicare and Dramatic Changes to Social Security Claiming Strategies

If you read my post/blog from a few days ago, you are aware that the recently passed Bipartisan Budget Bill of 2015 not only contained provisions for general federal spending and extending the debt ceiling, but also some significant matters concerning Medicare and Social Security.

The federal government made it official last week — there will be no cost of living adjustment for Social Security in 2016. Because of this projection, which first became publicly known in July, Medicare Part B premiums were facing significant increases to be passed onto just a fraction of the Medicare enrolled population, as well as new enrollees.

In the Bipartisan bill, Congress crafted a ‘solution’ to this looming problem by permitting Medicare to ‘borrow’ money from the Treasury, insuring lower rates. The bill  then arranged for Medicare to pay this ‘loan’ back with a surcharge payable by all Medicare beneficiaries. The official rates for 2016 premiums, deductibles, and coinsurances have not been published yet. They should be available in the latter part of November, along with all details regarding this accommodation.

Estimates say that the payback surcharge is to be about $3 per month. The Part B premium would rise to about $120 (versus $159 without the legislation). The Part B deductible will rise to about $160 (versus $223 without the legislation). The cost sharing of 80/20 remains the same. We will know for certain once CMS publishes the final numbers in about 2-3 weeks.

To re-iterate, those on Medicare and currently claiming Social Security will be ‘held harmless’ from paying the higher premium. Those not currently claiming Social Security, those new to Medicare in 2016, and those whose premiums are means tested to a higher payment level, will be paying the higher premiums.

Perhaps the most significant part of the legislation are changes to Social Security.This blog will summarize these changes – so contact us for greater detail.

Two popular claiming strategies have been terminated for use after 4/30/2016. The loss of the “file and suspend” strategy has the potential of costing some Social Security recipients between $250,000-$400,000 over their lifetimes.

The budget bill eliminates a Social Security benefit claiming strategy for couples that permit the higher wage earner to file and then immediately, voluntarily, suspend benefits if that earner has reached Full Retirement Age (66).

The lower wage earner of the couple could then file for spousal benefits (50% of the higher wage earner’s benefit), thereby creating a benefits cash flow for the couple. The lower wage earner has to be at least age 62. The higher wage earner, by suspending benefits, then could earn deferred credits (8% per year) and receive a higher benefit in the future. A maximum of 32% can be earned through age 70 through these deferred credits.

With the legislative change, for one member of the couple to draw a spousal benefit, the higher wage earner will also have to file and take their benefit (note the ages from the above paragraphs). Conversely, if after filing for a spousal benefit, if the higher wage earner were to take a voluntary suspension, all payments would cease to both members of the couple until the suspension is lifted. (Note the age bands, listed below)

This same restriction also will now also apply for payments to minors (under age 17) where a wage earner filed for benefits and immediately suspended payments to themselves, but allowed for a payment to the minor.

The bill was signed by the president on November 2, 2015. The bill contains a 180 day phase in period, which means that the clock is now ticking until full implementation of these changes. This is a remarkably rapid phase-in for such a piece of federal legislation. This means that, subject to the bill’s provisions, we have until April 30, 2016 to implement the “old” strategies for a retirement income plan for eligible parties.

For those people born before May 1, 1950, the old rules will continue as before, with no changes. For those born between May 2, 1950 and January 1, 1954 (ages 66 and 62), the old rules can be exercised within this 180 day period. After that the restrictions take full effect. For those born after January 1, 1954, the new restrictions come into play immediately.

No changes were made to either the widow benefit or the dependent child benefit resulting from the death of a wage earner, or to the survivor benefit. Furthermore, there were no changes made to the deferred credit benefit.

For those who have already started this strategy, their elections will be grandfathered and will not be forced to make any changes. For those who have made financial plans for these elections, but have not yet executed the strategy, we should speak seriously within the next several weeks and examine just how plans may be put into place, or to discuss the changes in more detail and how they may affect you.

Since Social Security is the foundational piece for a life long retirement income plan, these are dramatic changes that will require attention to one’s financial strategy. Please call me at your earliest convenience so we do not miss a moment in making certain your retirement plan is structured to accommodate these changes.

Allan Jensen
(originally posted 11/4/2015)