Budget deal would nix popular Social Security claiming strategies

Rapid implementation of entitlement changes, including a surcharge on high-income recipients of Medicare, could catch some near-retirees off guard

Oct 28, 2015 @ 2:07 pm

By Mark Schoeff Jr.

A budget agreement reached by congressional leaders and the White House would kill popular Social Security claiming strategies shortly after the measure becomes law, cutting off payments in midstream for beneficiaries, according to experts.

“The two main filing strategies will go away if this budget becomes law,” said Mary Beth Franklin, an InvestmentNews contributing editor and expert on retirement policy.

The legislation, which sets federal spending limits and raises the debt ceiling, contains several entitlement reforms. One of them would end the ability of a Social Security claimant to file for his or her benefits and then suspend receiving them while he or she collects benefits for a spouse. Such an approach can generate a more generous payout.

The bill also would restrict claims for spousal benefits. The changes would affect people who turn 62 in 2016 or later.

The House and Senate could vote on the budget bill later this week. Lawmakers faced a Nov. 3 deadline to lift the debt ceiling. To achieve that goal and pay for an increase in federal spending caps, negotiators required spending reductions as an offset. One of the areas targeted was Social Security.

“It would enact the most significant reform to Social Security since 1983, resulting in $168 billion in long-term savings,” Senate Majority Leader Mitch McConnell, R-Ky., said in a floor speech Wednesday.

The measure “closes several loopholes in Social Security's rules about deemed filing, dual entitlement and benefit suspension in order to prevent individuals from obtaining larger benefits than Congress intended,” states a summary of the bill.

Such changes are usually glacial, occurring over a number of years. This time, they were hammered out in weeks.

“People are shocked by the speed and the backroom budget negotiations,” Ms. Franklin said.

The implementation also will be rapid. Payments related to file-and-suspend strategies will end within six months of the budget bill being signed into law.

“This may affect a lot of people who may have already planned for this provision in their retirement plan,” said Dinesh Sharma, chief executive of Omyen Corp., a financial planning technology firm. “Those who are turning 62 may not have enough time to save more to offset this loss of benefits.”

Curtailing the tactic will reverberate beyond wealthy filers who take advantage of it, according to William Meyer, chief executive of Social Security Solutions, a firm that makes benefit-claiming software. Retirees with modest assets also will get less of a boost from Social Security.

“This change is going to promote people to take their benefits earlier,” when they are less generous, Mr. Meyer said. “The middle class are the ones who are going to get hurt.”

He also predicts the Social Security Administration won't be able to put the changes in place under a six-month deadline, producing administrative hassles.

“It's going to cause the biggest quagmire,” Mr. Meyer said.

The legislation also would place a surcharge on high-income recipients of Medicare, which will be costly for wealthy beneficiaries.

“It is critical to incorporate Medicare planning into retirement planning to minimize the impact of higher-income Medicare surcharges now and in the future,” Katy Votava, president of Goodcare.com, wrote in an email.

Estimated Medicare changes

Modified Adjusted Gross Income (MAGI) Medicare Part B Premium + IRMAA 2015 Estimated* Medicare Part B Premium + IRMAA* 2016
Individuals $85,000 or less, married couples $170,000 or less $104.90 $104.90 (hold harmless), $120 (not held harmless)
Individuals $85,001 - $107,000, married couples $170,001 - $214,000 $146.90 $171
Individuals $107,001 - $160,000, married couples $214,001 - $320,000 $209.80 $243
Individuals $160,001 - $214,000, married couples $320,001 - $428,000 $272.70 $315
Individuals above $214,001, married couples above $428,001 $335.70 $387
*The estimate is based on the budget proposal of Oct. 28, and is yet to be approved and promulgated. IRMAA is Income Related Adjustment Amount.
Source: Katy Votava, Goodcare.com

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