How Will Changes to Social Security Affect You?

Tuesday, November 3, 2015

By Tim Amen, CFP®

Here we are once again in the familiar territory with a last-minute deal to avert a US debt default. This has happened so often throughout the years that many Americans have become immune to the threat of a government shutdown as temporary Band-Aids have continually been put in place to avoid a catastrophe.

On Friday, October 30th, the Senate passed the updated and amended budget proposal the House approved just a few days earlier. President Obama has now finalized the bill by signing it into law on November 2. This deal is expected to greatly reduce the risk of a government shutdown over the next 2 years.

The budget bill increases spending by $80 billion over this two-year period, which is offset by an estimated equal amount of spending cuts and increased revenue. This proposal incorporates additional measures that will affect millions of Americans due to changes in Medicare and Social Security. Below are some of the modifications that have the greatest impact for current and future retirees.

Medicare

As we had hoped, Congress reduced the Medicare B premium increase for 2016 that would have affected the 30% of Americans not protected under the “hold harmless” provision.

The hold harmless provision does not allow Medicare B premiums to increase more than the Social Security cost-of-living adjust (COLA) in any given year. This premium protection covers the 70% of Medicare participants who have premiums taken directly from their monthly Social Security benefit and whose income is below $85k for single/$170k for married tax filers.  Since there will be no COLA increase in 2016, Medicare B premiums cannot be raised for the large majority of participants, which in turn places the increased healthcare cost burden on the remaining 30%.

It was projected that those not held harmless would see an increase of up to 52% in their Medicare B premiums starting in 2016. The current bill avoids this large increase with a more moderate change of approximately +14-15%. The bill also extends this premium protection in the event there is no Social Security COLA in 2017.

Social Security

The changes to Social Security are more complex and have a broad impact on many types of benefits (spousal, ex-spousal, children’s, etc.). Below is a general overview of the changes.

  • File and Suspend/restricted application strategy for spousal and other benefits will no longer be allowed.
    • In other words,  spouses, ex-spouses, children, and/or others will not be able to receive benefits based on someone else’s earnings record, unless that person is actually receiving benefits (not if benefits are suspended or delayed).
  • Disability Benefits: Prevents a potential 20% cut to Social Security Disability Insurance that was set to take place in 2016.
  • Lump sum option is eliminated: if benefits are suspended, retirees will no longer have the choice to retroactively unsuspend benefits prior to age 70 and receive a lump sum payout.

An amendment to the original bill did grandfather in anyone who is already using the file-and-suspend/restricted application strategy. Also, anyone who turns age 62 or older by the end of 2015 will be able to file a restricted application for spousal benefits at full retirement age as long as their spouse has already claimed retirement benefits or has requested to file and suspend their benefits within six months after enactment of the law.

The above changes to Social Security are basically an extension of the “deemed filing” rules that have been in place for those taking benefits prior to full retirement age. This rule now comes into play, not just for early filers but for those beyond full retirement age as well. Deemed filing states that if you apply for Social Security benefits, you are applying for all of the benefits you are entitled to at that time (your primary benefit, spousal benefit, etc.). Social Security will initiate the highest eligible benefit, but you are not able to choose which benefit you receive now and you are not able to switch to another benefit later (in most cases).

So what hasn’t changed?

  • You are still able to suspend benefits at full retirement age and accumulate an 8% per year benefit increase until age 70.
  • Survivor Benefits: Deemed filing never applied to survivor benefits and will not apply going forward. In other words, widow/widowers will continue to have the choice of which benefit to take and can switch to the other in the future.

Moving forward

We fully expect future changes to both the US retirement and healthcare systems. As always, here at Brighton Jones, we continue to monitor our clients’ long-term plans and goals to adjust for any changes, political or otherwise, that may affect previous assumptions.

In regards to these recent and time sensitive events, we will be reaching out to clients turning age 66 within the next 6 months to discuss how we can still take advantage of Social Security strategies that will no longer be available in the near future.  If you are not a client, we encourage you to contact us for assistance.

Download our Social Security webinar here.

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