What the Budget Bill Means for
Your Social Security and Medicare Benefits
Tuesday, October 27, 2015
By Beverly DeVaney, IRA Technical Expert
Retirement planning for millions of Americans
could be about to change dramatically. The current
version of this year’s budget includes a number of
provisions that would significantly impact both
Medicare enrollees and those trying to employ savvy
planning tactics to get the most of their Social Security
benefits. Here’s what you absolutely need to know:
The File-and-Suspend
Strategy Will be Eliminated
Under the current rules, once you reach your full
retirement age, or FRA for short, you are able to file
for your Social Security benefits, but request that such
benefit not actually be paid. What may seem like a bunch
of meaningless paperwork – after all, what’s the point
of filing if you’re not actually going to get something –
can, in fact, serve a variety of important purposes. Most
notably, once you have filed for your own benefit, it
allows certain other family members – most commonly a
spouse – to claim a benefit using your earnings record.
Note that it’s not the act of receiving benefits that allows
another person to claim benefits off of your earnings record.
It’s the act of filing. That’s a key difference. Under the current
rules, if you’ve reached your FRA and have filed for your
benefit, you may voluntarily choose to suspend that benefit.
By doing so, you can receive what are known as delayed
credits, which increase your own Social Security benefit by
8% per year, not counting any cost-of-living adjustments
that may also be added. Thus, by using the file-and-suspend
strategy, you can both allow other family members to claim
a benefit off of your earnings record, while at the same
time allow your own benefit to continue to compound
and grow. But all of that could soon be changing.
Under the current budget bill, the file-and-suspend
strategy would be eliminated. Instead of family members
being allowed to receive a benefit off of your earnings
record after you’ve merely filed, the bill would make it
necessary for you to actually be receiving benefits for
them to do so. Thus, if you are planning to use the fileand-suspend strategy as part of your planning, you could
soon be faced with a more difficult choice. On one hand,
you could hold off on receiving your own benefit until
as late as age 70. That would make your benefit as large
as possible, but would prevent other family members
from receiving benefits based on your earnings until
that time. On the other hand, you could begin receiving
benefits sooner. That would reduce your benefit, but
would also allow other eligible family members to
claim a benefit off of your earnings record sooner.
SOURCE: https://www.irahelp.com/slottreport/what-budget-bill-means-your-social-security-and-medicare-benefits
The Restricted Application
Strategy Will be Eliminated
There are many situations in which you may be
eligible to receive more than one benefit provided by
Social Security. For instance, you may be eligible to receive
a retirement benefit based on your own earnings record
and a spousal benefit based on the earnings record of
your husband or wife. Under the current rules, once you
reach your FRA, you can file what’s known as a restricted
application. By filing a restricted application, you are
essentially telling Social Security “pay me only my spousal
Social Security benefit, not my own retirement benefit.”
By utilizing this approach, you can receive at least some
Social Security benefits, while still allowing your own
retirement benefit to earn delayed credits until as late as
age 70. At that time, you could switch over to your own,
higher, benefit. But all of that could soon be changing.
Under the current budget bill, the restricted
application strategy would come to an abrupt halt. The
bill calls for an expansion of an existing Social Security rule
known as deeming. Should the bill pass without being
modified, regardless of whether you were filing for your
retirement or spousal benefit, you would be deemed
to be simultaneously applying for both (this is actually
how it currently works for those filing prior to their FRA).
Thus, you would not be able to file solely for your spousal
benefits while allowing your own benefit to continue to
compound and grow. Instead, you would be forced to either
wait until as late as age 70 to receive a higher benefit, but
receive nothing in the interim, or you could begin receiving
smaller benefits sooner. Neither option is as attractive
to the restricted application strategy available today.
High-Income Medicare Part B
Participants Will Get A Break
Most people enrolled in Medicare Part A receive that
coverage at no cost (at least not in the form of premiums).
Medicare Part B coverage, on the other hand, generally
comes with a price. Most Medicare Part B participants
pay monthly premiums of $104.90, deducted directly
from their monthly Social Security benefits. In fact,
that population represents about 70% of all Medicare
Part B participants. So why is that important?
Well, under a Social Security rule known as the hold
harmless provision, those participants cannot see a drop
in their Social Security checks from one year to the next.
Thus, if there is no cost-of-living increase for their Social
Security checks from one year to the next, there is no
way to increase their Medicare Part B premiums. And
guess what? There is no cost-of-living increase for Social
Security checks for 2016! So Medicare Part B premiums
for those individuals cannot increase next year.
But Medicare has to get its money from somewhere,
right? Right. So where does that money come from?
The answer, unfortunately, is the other 30% of
Medicare Part B participants. Under the current law,
they would be stuck plugging the shortfall in Part B
premium payments. That means projected increases
of upwards of 50% for those individuals. Ouch! But
all of that could soon be changing (thankfully!).
Under the current budget bill, the U. S. Treasury would
loan billions of dollars to Medicare to help meet expenses
and reduce the impending Part B premium increase for
those impacted. Of course, that loan will have to be paid
back, and those payments, at least initially, are expected to
come from... you guessed it, Medicare Part B premiums.
What to do Now?
For now, the bill is just a bill and not law (I feel a
Schoolhouse Rock song coming on). And if I had a nickel
for every time a bill affecting retirement was proposed, I
would be sipping piña colada’s on my own private island
instead of writing this, but having said that, it seems
likely that at least some of these changes will end up in
the final version of the bill in some way, shape or form.
Until we know what the end result is, there’s no sense in
panicking, but you shouldn’t just sit around and do nothing
either. You may have relied upon using one of the Social
Security strategies up on the chopping block to help you
fund your retirement. Well, even if it doesn’t go away now,
it certainly appears as though our lawmakers are willing to
put it on the negotiating table. So, you may want to revise
your retirement plan to make sure that, if these provisions
are reduced or eliminated altogether, you can still retire
comfortably without worrying about running out of money.
Stay tuned to The Slott Report for the latest updates
and news on this and other retirement-related issues.
SOURCE: https://www.irahelp.com/slottreport/what-budget-bill-means-your-social-security-and-medicare-benefits