Breaking News-Changes to Social Security
Several Social Security and Medicare issues have been making headlines this week. In an effort to help you understand the implications, we have summarized the changes below. These changes could impact your Social Security benefits if you or your spouse will reach your Full Retirement Age (FRA) of 66 in the next six months, if you have already reached your FRA but have not yet filed for benefits, or if you were born after 1954 and were planning to file a restricted application for spousal benefits.
Social Security Cost of Living Adjustment
The Social Security Administration recently announced there will be no cost of living adjustment (COLA) applied to benefits for 2016. Benefits get an automatic increase if there has been a rise in the Consumer Price Index (CPI) over the previous year. However, the percentage increase in the CPI for the past year was negative due in large part to declining energy prices. Fortunately, under current law, the COLA for Social Security will never be less than zero to ensure that benefits are not reduced.
Because there will be no COLA, the Medicare “hold harmless” provision has been triggered for 2016. This provision protects recipients from increases in Medicare premiums if the increase would reduce their Social Security benefit check. However, about 30% of Medicare recipients are not protected, and they bear the entire cost of any increase. Unprotected recipients include people who pay their premiums directly (someone who is on Medicare but is not receiving Social Security benefits), people enrolling in Medicare in 2016, or those with incomes that exceed the threshold levels of $85,000 for individuals and $170,000 for couples.
The standard Part B premium was projected to increase about 52%, but legislation (see below) has limited, but not completely avoided, the premium increase for those not protected by the hold harmless provision. The 2016 premium increase will be 15%, with the shortfall paid through loans from the U.S. Treasury. Beginning in 2017, the plan calls for all Medicare recipients to begin repaying the loan through higher Medicare premiums.
Congressional Action on Social Security Claiming Strategies
On Friday, October 30, the Senate passed the Bipartisan Budget Act of 2015, which is expected to be signed into law by President Obama within days. The bill contains provisions to end perceived loopholes in Social Security rules and will affect the use of both the restricted application and file-and-suspend strategies for retirement and spousal benefits. It appears that survivor benefits will not be impacted by the legislation, allowing widows and widowers to continue to optimize the timing of retirement and survivor benefits.
Under the new rules, when people file for benefits at any age, they will be deemed to have filed for both their own retirement benefit and any spousal benefit. Previously, deeming rules only applied to those who filed for benefits early (before their FRA).
The option to file a restricted application will still be available to people who turn 62 by the end of 2015 (those born in 1953 or before). Anyone born in 1954 or later will not be eligible.
Changes to the file-and-suspend strategy will be implemented using a six-month grace period following the effective date of the legislation. People who have reached their FRA or will reach their FRA during the grace period will be grandfathered in if they file and suspend within this period. Those who reach their FRA after the grace period will not be eligible for this option. Any voluntary suspension after the grace period will suspend all benefits associated with that earnings record.
What This Means
There are no changes if you currently receive benefits under a restricted application or file-and-suspend strategy.
If you were born in or before 1953, you will still be eligible to file a restricted application for spousal benefits. You will fall into one of three categories depending on your spouse’s filing status:
If your spouse is already receiving benefits or will file for benefits, you will be able to receive spousal benefits. You can file a restricted application to allow your retirement benefits to receive the Delayed Retirement Credit and then switch to your own higher retirement benefit at age 70.
If your spouse has reached or will reach his or her FRA within the coming six-month grace period and either files for benefits or files and suspends, you will be able to receive spousal benefits. You can file a restricted application to allow your retirement benefits to receive the Delayed Retirement Credit and then switch to your own higher retirement benefit at age 70.
If your spouse does not file and suspend or reach his or her FRA within the coming six-month grace period, you will not be able to receive a spousal benefit until your spouse files and begins receiving benefits.
These changes may affect your retirement plans, and time-critical action may be required. We are working diligently to stay on top of how these changes will impact those we advise. If you have questions, please give us a call at (858)509-9500. We look forward to helping you address your specific situation.