October was a wild month for the markets—and for many baby boomers who planned for retirement income by synchronizing and coordinating their timing for claiming Social Security benefits. The last week in October saw Congress put an end to two Social Security filing strategies that many couples have used to add tens of thousands of dollars to their retirement incomes. However, there is a six-month window in which couples who are at least 66 years old can still take advantage of these strategies, and a partial reprieve, through grandfathering, for some other provisions as well.
Social Security “Loopholes”
As part of the Bipartisan Budget Act of 2015 (H.R. 1314), an effort to raise the U.S. debt limit, two key Social Security loopholes have been closed: file and suspend, and restricted application for spousal benefits (these are explained below). The ban on file and suspend will start with suspension requests submitted 180 days after the enactment of the bill. The ban on filing a restricted application will apply to anyone who turns 62 in 2016 or later. Last Wednesday evening, Oct 28, the House approved the bill, and the Senate passed it early Friday morning. The President signed the bill Monday, Nov 2.
Depending on when your birthday falls, this may affect your Social Security planning.
- If you are over 62 now (or will turn 62 before the end of the year), you may still file a restricted application for spousal benefits when you turn full retirement age. The ability to collect a spousal benefit while your own benefit builds delayed credits is considered one of those loopholes that only the wealthy are taking advantage of. It will be closed in four years. If you will be turning 66 during the next four years, you may still take advantage of it.
- File and suspend will be disallowed starting six months after the enactment of the law. This popular strategy allows a husband, say, to file for his benefit to entitle his wife to her spousal benefit, after which he immediately suspends his benefit to build delayed credits. While voluntary suspension will still be allowed, no spousal or dependent benefits may be paid based on a suspended benefit. After April 2016 there will effectively be no reason to file and suspend. Over the next six months, if you are eligible for this strategy (that is, you are over full retirement age and want your spouse to receive a spousal benefit while your own benefit grows to age 70), you will still be able to implement it. After that, it will be disallowed.
- If you turn 62 by December 31, 2015, spousal strategies that take advantage of these closing loopholes will not be available to you. If you have been counting on spousal benefits from a higher earning spouse as part of your retirement income plan, you will need to take them off the table and consider other sources of retirement income.
It will now be more important than ever to maximize Social Security benefits by claiming at the appropriate time. Usually, this means delaying benefits to age 70 to build maximum delayed credits. This will generally provide you and your surviving spouse with higher lifetime income. If you are retiring earlier than age 70, you should consider other sources of income during the bridge period, from retirement to age 70. We will keep you updated as events transpire. Let us know if you have any questions.
Medicare Part B Relief
70% of Medicare beneficiaries have Medicare Part B premiums of $104.90 a month deducted from their Social Security payments. Yet under Social Security’s “hold harmless” provision, benefit checks cannot decline from one year to the next. Since there has been no consumer inflation, Social Security recently announced there would be no annual cost-of-living adjustment for 2016. Therefore there was no way to raise Part B premiums for most beneficiaries without violating the hold-harmless rule.
Thus, the 30% of beneficiaries who do not have $104.90 deducted from their Social Security checks would have to cover the total increase in the Medicare Part B premium increase. For those with incomes below $85,000 ($170,000 if filing jointly), monthly costs had been projected to climb 52% to $159.30. Under the Bipartisan Budget Act, Part B premiums will rise just 15%, to $123 a month. The groundbreaking Social Security reform contained in the budget legislation was approved at breathtaking speed and without committee hearings, public testimony, or open debate. Regardless, the current Social Security and Disability programs were in need of reform. Historically, such reforms have been limited in scope, instituted over a long period, and designed to allow potential beneficiaries to take appropriate steps through good planning to mitigate any future reductions in benefits. Now, if you are just 4½ years out from reaching the Social Security full retirement age (66) you have lost two key tenets of social security claiming strategies.
That makes your long-term financial planning more important than ever. Don and I look forward to working with you to review and refine your long-term financial goals and objectives, and to update, if necessary, your retirement income strategy and portfolio allocation.
Please let us know if you have any questions regarding anything we have discussed in this month’s newsletter. Don and I thank you for the opportunity to work with you and your family.