Sunday, November 1, 2015

End of File-and-Suspend and the Breathtaking Medicare Spike that Wasn’t

Last week, Congress passed the Bipartisan Budget Act of 2015, the compromise deal that President Obama has said he will sign as early as Monday, November 2, 2015. Part of the bill effectively ends so-called “file-and-suspend” Social Security claiming strategies and mostly fixes a feared spike in 2016 Medicare Part B premium costs.

File-and-suspend is (was) one of several “claim now, claim more later” strategies for maximizing Social Security benefits, primarily beneficial for married couples. It typically involved having one spouse claim spousal benefits for up to four years between ages 66 and 70 before switching to his or her own larger retirement benefit. This allowed the higher-earning spouse to delay claiming and increase future benefits while the spouse received a smaller benefit for a few years.

That’s an over-simplification, but unless your household is grandfathered in, the details of a now-defunct strategy probably aren’t important to you. According to Michael Kitces, “restricted applications. . . to receive just spousal benefits and not individual retirement benefits” are grandfathered in for those born in 1953 or earlier, but “the new rules limiting suspended benefits will apply to anyone who tries to file-and-suspend after a 6 month grace period beyond the effective date of the legislation.” In other words, unless you’re at least 65 ½ years old Monday (assuming the bill is signed into law then as expected), file-and-suspend is no longer an option for you.



The end of the “file-and-suspend” Social Security claiming strategies won’t affect most households.
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The press had raised alarms recently over an expected huge increase in Medicare Part B premiums for 2016 as reported, for example, in a recent article at AARP. The increase would have resulted from an obscure part of Medicare law that ties COLA increases to Part B premiums, combined with the lack of a Social Security COLA increase announced for 2016.

The Washington Post reports that the "Budget deal blunts, but doesn’t erase, increase in Medicare premium". Prior to the new law, about one in three older Americans would have seen a premium increase just north of 50% in 2016, but that increase will now be about 17%. According to the Post, the group subject to the increase includes "people who do not collect Social Security, will be enrolling in Medicare’s Part B next year for the first time, have incomes great enough that they are charged higher premiums, or are poor enough that they also qualify for Medicaid." Again, two-thirds of recipients won't be affected either way.

What does all this mean for the typical retiree? The changes to Social Security rules mean that, unless you are grandfathered in by your age, strategies like file-and-suspend are no longer available to you. If that was part of your retirement plan, you need to revise it. If you were worried about a Medicare Part B premium spike next year, it won’t be as breathtaking as the press has led us to believe, but that doesn’t guarantee there won’t be dramatic premium increases in future years. Remember, the spike was related to the fact that there was no Social Security COLA adjustment for 2016.

It also means that books and software about Social Security benefits optimization are now outdated. Mike Piper says he plans to update his book, Social Security Made Simple, very soon. Laurence Kotlikoff’s MaximizeMySocialSecurity website currently posts a warning on the site’s opening page saying, “Alert! Major SS Benefit Changes Pending!” Kotlikoff has also promised updates to his software as soon as possible.

In the meanwhile, if you are interested in the fine print, Wade Pfau, Mike Piper and Michael Kitces are my go-to guys for Social Security issues. Kitces has an excellent post at his Nerd’s Eye View blog. I also recommend Piper’s post  at the outstanding ObliviousInvestor blog and the excellent discussion at this Boglehead’s forum. Robert Powell has a very readable column on the topic at MarketWatch.

Sometimes the early reads on law changes gain clarity over the following days and weeks, so waiting until the dust settles and the books and software have been updated to see the law’s impact on your own retirement plan might be the best approach.

The end of the “file-and-suspend” Social Security claiming strategies won’t affect most households. Nearly half claim benefits at age 62, the earliest possible age, probably because they can’t afford to delay the income according to Motley Fool. U.S. News reports that only about 5% delay claiming until after full retirement age to maximize their longevity insurance. About 2% claim maximum longevity insurance at age 70.

The file-and-suspend strategy required the lower earning spouse to delay claims until full retirement age (currently 66 for those born between 1943 and 1954) and the higher-earning spouse to delay even longer (to 70 for maximum benefit).

No huge Medicare premium spike is good news for retirees and no more file-and-suspend is maybe not so good. This week's news illustrates a reality of retirement financial planning: good news or bad, very little is cast in stone.




On a related note, see the sidebar for three timely pieces on Social Security written by Wade Pfau at the Retirement Researcher blog.

Second, thanks to those of you who responded to my survey regarding retiree attitudes toward investment portfolio volatility when non-discretionary expenses are safely covered by Social Security benefits, pensions and annuities. I promised to share the results here and, based on the first 100 responses, they are as follows:

  • 15% would take maximum risk with their investment portfolio if they knew non-discretionary expenses were safe,

  • 2% said they wouldn't invest retirement savings in stocks even if non-discretionary expense were covered,

  • 83% said that, even if they felt non-discretionary expenses were safely covered, they wouldn't risk a huge loss such as they might have seen in the 2007-2009 bear market with an all-stock portfolio.

Please don't confuse this with a scientific poll – it is far from it – but it does suggest that many retirees still worry about portfolio volatility even when the rent and grocery bill are safe.

18 comments:

  1. The file-and-suspend strategy required the lower earning spouse to delay claims until full retirement age (currently 66 for those born between 1943 and 1964). I think it is between 1943 and 1954.

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  2. If you are not paying the chef or working in the policy kitchen, then you are probably on the menu.

    This was a Social Security claiming strategy that I was planning on using for us. It is clear that people who have been diligently saving so that they can execute these types of strategies are in the Washington gunsights. So, at this point we will likely simply draw on my spouse's FRA benefit while delaying mine (which will definitely be the bigger of the two), primarily because of the potential future survivor benefit as well as my own.

    More importantly, it was a strategy that I was introducing to my divorced sister-in-law. She has some savings that she could have used to cover the difference between her ex's spousal benefit and her own social security for the 4 years from 66 to 70 to maximize her own social security benefit for the long-haul. It is unlikely though that she will now want to take out and extra $30k - $50k from her savings to cover the entire benefit amount for the four years, so I think this is a category of person that this decision will impact significantly.

    Since they were so diligent In closing loopholes, I am surprised ;) that they didn't take the opportunity to close the "carried interest" loophole used by hedge fund managers to get their performance fee treated as deferred capital gains at capital gains tax rates instead of ordinary income. My understanding is that the cost to the Treasury of this carried interest loophole is of a similar magnitude as this file-and-suspend strategy. I assume that the rationale for that is that an increase in tax on the wealthy would be bad policy while a decrease in "entitlement" benefit for the middle-class is good policy.

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    1. You are not paranoid if they really are out to get you. The top 20% is where the money is. The top 1% hires lobbyists and funds PACs to defend theirs. So that leaves....

      I read the Boglehead blog post string. Very interesting. It doesn't change the fact that the strategy vanishes for us and my sister-in-law (unless survivor benefits come into play at some point since her ex is significantly older).

      I did come to one major conclusion though. The justification for eliminating these provisions is that "only well-off people take advantage of it". I can't even conceive of how a typical person on the street could figure out how to navigate this maze of jargon without great effort. Anybody without excellent reading and comprehension skills would be toast unless guided by a financial expert. The SSA has created an entire language of techno-jargon that requires careful study and translation. Similarly, I know a couple of people (with graduate degrees and fluent in English) that are in the process of trying to get immigration visas and they have made the same complaints about the INS forms and rules. They have told me they couldn't even conceive of trying to navigate the INS process if they didn't have superb English skills.

      What is it about the US that turns all interactions with the government into a foray into a techno-babble swamp of mind-boggling bureaucratic complexity? The good news is that we don't have to worry about WW III because the paperwork to get it started would be too complex and confusing to get done in a reasonable amount of time.

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    2. You are correct that "only well off people taking advantage of file-and-suspend" is/was used as a justification for eliminating this option, however, there was only a slight skew toward the wealthy.

      From the Kitces piece:

      "Within a decade, the Center for Retirement Research was estimating that the availability of these strategies could “cost” the Social Security Administration as much as $9.5B in additional benefits being paid out every year (if everyone did it), with a slight skew towards those at higher income levels (46% of the additional benefits being paid out to the top two wealth quintiles), and the biggest additional benefits going to households that otherwise had similar earnings between spouses."

      As you suggest, most people don't know nearly enough about Social Security to take advantage of such a strategy without the help of a financial adviser, which they probably wouldn't seek.

      Of course, you can get this advice online for 40 bucks at MaximizeMySocialSecurity.com.

      The bigger problem is that most Americans can't afford a strategy that delays benefits. They need the money as soon as they retire.

      Thanks for writing!

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  3. The last week is the first time I've been glad to have been born in 1953. My reading of Michael Kitces blog and confirmed by today's WSJ is that file and suspend is dead but spousal benefits are alive and well if you were born in 1953 or earlier. Whenever one spouse files for their own benefit, the other spouse can make a restricted application for spousal benefits (if they both are at FRA or older) until age 70 when the second spouse can file for their own benefit. I signed up for Dr. Kotlikoff's software program, Maximize My Social Security, which is seeming more and more a bargain at $40. He is re-programming in light of the new law. I'll use the revised software to know when best to have my wife start her benefit; begin taking my spousal benefit; and then when to start my own benefit. Even if it says we both should wait until age 70, since my wife is eight months older, I'll still get spousal benefits for eight months. Thank you Dirk, for chatting with me about this in emails this afternoon.

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    1. Ron, I confirmed this with Mike Piper at ObliviousInvestor. File-and-suspend is dead for anyone who won't be at least 66 years old in the next 6 months, but in the scenario you describe, neither of you will file and suspend. You will simply file a restricted application for spousal benefits, which will still be available to anyone born in 1953 or earlier.

      The difference between your strategy and a file-and-suspend strategy is that your wife won't attempt to file earlier and suspend benefits while her benefit grows. She will simply file at age 70 for her own maximum benefit. You can then file a restricted application for your spousal benefits only and convert to your own higher benefit at 70.

      I, too, look forward to re-running an updated MaximizeYourSocialSecurity.

      Congrats on choosing your birth date well!

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  4. For years, AARP's web site (and some other sites) have offered free SS Benefits calculators that give good guidance on how to maximize benefits for scenarios involving oneself and optionally a spouse. Sure, the rules are now changing. But with well-designed and free online calculators such as AARP's, it doesn't have to be excessively complicated for most folks. I am uncomfortable with people making money giving so-called indispensable guidance about SS claiming strategies that in reality has been easy to obtain for free...

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    1. I've tried most of them and they all give different advice and results for me. Maximize My Social Security is the only one I've found that let's you enter a discount rate for the time value of money.

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    2. I tried a couple and got consistent answers. They generally agreed with my own personal analysis. The best of them IMO is the Bedrock Claiming calculator.It allows for a discount rate as well as inflation.Its useful lifetime is of course coming to an end.

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  5. I appreciate your opinion but don't agree. I find the advice at AARP and other free sites inferior to sources like Mike Piper's book and MaximizeMySocialSecurity.com. The claiming decision can be quite complicated and the results quite dramatic. I find $40 cheap insurance against making a decision that could cost you a bundle.

    Thanks for writing!

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  6. The data you cited on claiming ages is seriously out of date. Wade Pfau has an article on Forbes (7 Nov 14) that shows nearly 10% of claimants in 2014 were FRA or beyond. While it still won't effect most (or even a lot) of households, the argument is more sound when based on the more accurate data.

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    1. "Seriously" is a bit of a stretch. Yes, the data has been changing for a while, but we don't know if it is a permanent change. Some suspect the claims are coming later because people are working longer as a result of the last bear market.

      While newer data is always better, it doesn't change the point. Wade has also written (in the article you cite, as I recall) that the loss of file-and-suspend shouldn't be overly concerning because it would mostly have been used by people who could afford to delay claims. That wouldn't include people who claim later because they have to work longer. (Most people can't afford to delay.)

      I find it a pretty sound argument either way.

      Thanks for writing!

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  7. I am one of those caught in the middle of this fish soup. According to SSA, 180 days after the enactment of BBA 2015 is 29 APR 2016. They are correct, but the language of the bill says it affects those who have not REQUESTED the File and Suspend (F&S)option before that date. There's an SSA policy that says you must be at Full Retirement Age (FRA) to request F&S. And, notably, there's another policy saying you can request a Retirement Insurance Benefit (RIB) up to four months before reaching FRA.

    So a lawyer named Avram Sacks wrote a lengthy piece on what the cut-off date should be. See https://www.socialsecuritytiming.com/index.cfm/knowledge-base/articles/a-different-view-on-social-security-changes-in-the-bipartisan-budget-act-of-2015/.

    I just filed my appeal. Let's see.

    Best regards

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    1. Thanks for the link. Please keep us posted.

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  8. How do I get a copy of your paper, "Sequence of Return Risks: A New Way of Looking at Spending or Saving Scenarios with Path Dependence?"

    Thanks

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    1. I believe you are referring to a paper published in the RIIA Journal. If you email me at jdcplanning@gmail.com, I'll send you a copy.

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