Social Security: The Hidden Changes in the Two-Year Budget Bill

More is being written about the Social Security changes in the budget bill passed by Congress and signed by President Barack Obama on Nov. 2, 2015, than any other item contained in the legislation (see the Bipartisan Budget Act of 2015, P.L. 114-74, or the Act). The result of the changes to Social Security bifurcates the Baby Boomer generation into the haves and the have-nots.

The early Boomers, those born from 1946 to 1953, will be allowed for the most part to take advantage of planning opportunities that have existed since the Senior Citizens' Freedom to Work Act of 2000, P.L. 106-182. The younger cohort of the Boomer generation, those born from 1954 to 1964 and all subsequent generations, will be unable to use the planning strategies that have afforded couples some extra money in their Social Security checks. The rationale used to eliminate these planning strategies was that only the top two quintiles (40%) of earners were taking advantage of them, which meant to Congress that only the well-to-do were benefiting. The top two quintiles are PFP practitioners' clients. Probably the bottom three quintiles would have been just as likely to take advantage of these strategies had they been properly informed of them and would have benefited to a greater extent because they rely on Social Security for a larger portion of their retirement income. So, what happened?

A spouse and/or qualifying child is allowed to receive a Social Security benefit on the work record of the other spouse only when the other spouse files for his or her own Social Security benefits. The file-and-suspend strategy allows a worker to file for purposes of allowing his or her spouse and qualifying children to begin collecting Social Security benefits on his or her work record, but the same worker defers collecting his or her own benefit until a later age, accruing an 8% per year added benefit through age 70. File and suspend, as just described, will still be allowed for anyone who is age 66 or older by April 29, 2016—180 days after the bill was signed into law on Nov. 2, 2015.

File and suspend is still part of Social Security, but it is limited to the worker only, for those 66 and younger after that date. After that, the file-and-suspend strategy will allow a worker who has started receiving benefits to suspend those benefits to accrue delayed retirement credits from that point until the worker begins benefits again, up to age 70. Suspending benefits for a worker will now suspend benefits for everyone involved, not just the worker. A spouse and/or qualifying children will be allowed to collect a Social Security benefit on a worker's record only when that worker himself or herself is actually receiving benefits.

Another change affects the ability to file a restricted application for a spousal benefit only. Previously, a married person at full retirement age (age 66 for workers currently eligible to file for their benefits) was allowed to file a restricted application with Social Security for a spousal benefit only. This allowed the married person to collect one-half of his or her spouse's benefit and defer the collection of his or her own benefit to a later date, up to age 70, accruing the 8% per year in delayed retirement credits on his or her own benefit. People who were 62 by the end of 2015 (those born in 1953 or earlier) are still allowed to file a restricted application. People born in 1954 and later will not be allowed to file for only a spousal benefit at full retirement age.

Previously, a person could file and suspend at full retirement age (this worked for single people as well—the only way a single person could benefit the same as a married person) and before age 70 ask for the suspension to be stopped. The person would then collect a lump-sum payment for all of the monthly benefits suspended since full retirement age (again, currently age 66) and start getting a monthly check as if he or she had started benefits at full retirement age.

Who used this? Life-changing events happen to the elderly more frequently than when they were younger. A person who elects to defer collecting benefits to age 70 assumes he or she will live beyond age 81, which is roughly the break-even point at which waiting until age 70 to claim benefits results in collecting more lifetime benefits than if he or she began collecting benefits at age 66.

The lump-sum option was an insurance policy of sorts. Beneficiaries who applied for benefits under file and suspend might find out between the ages of 66 and 70 that they had an illness, disability, or disease that would shorten their life expectancy. That person could then go to Social Security and request a lump sum and would receive all of the previously suspended benefits since full retirement age and begin a monthly benefit from that point forward.

The lump-sum option is no longer available for anyone who is not age 66 or older before April 30, 2016—the end of 180 days after the signing of the Act.

In light of these changes, practitioners should review their client database to see who was born in 1953 or earlier. They can discuss with these clients how lucky they were to get in under the wire of this legislation and how they can benefit from something that people younger than age 62 cannot. With clients younger than age 62, practitioners can emphasize that the expiration of these planning strategies for Social Security makes it even more important for them to save adequately for their own retirement. The PFP practitioner's skills will be put to good use showing those younger clients where they can find the extra dollars they need to save.

Medicare Part B premiums were expected to rise over 50% before the Act. This sharp increase would have affected people turning 65 in 2016; older workers who are not yet on Part B because they are still employed and on their employer's health plan; and those who had elected to file and suspend in the past and have not yet begun collecting Social Security benefits. The legislation capped the increase on these people to 15% plus a $3 surcharge, or $123 per month. The $3 surcharge is an "interest free loan" and continues for as long as it takes that group to pay the remainder of the 52% increase. Seniors who have been on Part B up to now experienced no increase and continued to pay $104.90 per month in 2016. Singles who have taxable income greater than $85,000 and married couples whose taxable income is greater than $170,000 are still subject to higher Part B premiums.

The portion of the Social Security Trust Fund that is set aside for disability Social Security benefits was expected to run out of funds during 2016 (see The 2015 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, available at www.ssa.gov). The Act took $150 billion from the Social Security side of the trust fund and moved it to the disability side, shoring up the disability side through 2022. Some might call that kicking the can down the road. While the Act points out that it shores up the disability side, it fails to mention how much sooner the regular Social Security side of the trust fund will run out of money as a result of this transfer. The Board of Trustees' 2016 report will no doubt explain the extent to which this maneuver shortens the life of the Social Security side of the trust fund.

Many legislative changes have been made to Social Security since the program was created over 80 years ago. The changes made in the Act had the largest effect of any Social Security legislation since 2000. Certainly, more changes will come. Nearly 80% of retirees look to Social Security to provide nearly half or more of their annual income. It is important for PFP practitioners to stay informed of these changes so they can help clients achieve the goal of a financially secure retirement.

Editor's note: After the publication of this item, the Social Security Administration clarified that the last date for filing for suspension of benefits under the old rule is April 29, 2016.