Personal Finance

What the budget deal means for retirees

Can you really retire?

Congress' recent budget deal, reached weeks before a potential debt ceiling crisis, has some experts shaking their heads in wonderment.

"It's an unexpected bit of sanity coming out of Washington," said Richard Johnson, a senior fellow at the Urban Institute.

Advocates for the elderly are also pleasantly surprised at the number of provisions they view as sensible compromises, especially when it comes to retirement security.

"This is a plus plus. This was a big, big gain for older Americans," said Cristina Martin Firvida, director of financial security and consumer affairs at AARP.

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One of the most important elements of the deal for seniors, experts said, is the shoring up of Social Security disability insurance. The program was in financial crisis, and beneficiaries were facing a potential 20 percent cut in their benefits in 2016.

The budget deal tweaks how payments into Social Security by employers and employees are allocated to give the disability insurance program some breathing room. Currently, the government collects 6.2 percent of income from employees and 6.2 percent from employers (along with 12.4 percent from those who are self-employed.) Of that, 10.6 percent goes to the main Social Security trust fund, and the rest, 1.8 percent, to the disability fund.

The deal increases the share going to the disability fund to 2.37 percent for three years, buying time for Congress to come up with a longer term solution to the challenges facing both Social Security trust funds.

"That's a lot of peace of mind for 11 million Americans [receiving disability benefits] and their families," said Firvida, noting that roughly 70 percent of beneficiaries are age 50 or over.

Johnson points to another element of the deal as especially important for seniors: a move to curb Medicare Part B premium hikes. Social Security payments will not be increasing next year because inflation is so low, but regulations bar Social Security recipients from seeing their checks reduced. At the same time, Medicare Part B premiums were on track to increase.

As a result, the roughly 70 percent of beneficiaries who have premiums deducted from the Social Security check would not pay higher premiums — but 30 percent of beneficiaries would have had to cover the entire increase. Their premiums could have risen some 52 percent.

The budget deal addresses this by having the Treasury lend $7.5 billion to the Medicare program, so beneficiaries paying the increase will see premiums rise roughly 15 percent — a sharp hike, but much less than without the loan. And in 2017, Medicare beneficiaries will start repaying the loan to the tune of $3 per beneficiary per month.

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Other changes have been met with dismay in some quarters, notably tweaks to the Social Security program to eliminate certain claiming strategies. These strategies, commonly known as "file and suspend" and "claim now, claim more later," generally allowed married couples to have one spouse start claiming spousal benefits at full retirement age while the other allowed his or her own benefit to continue growing. The Center for Retirement Research at Boston College estimated that these strategies cost the government roughly $10 billion annually.

The budget deal eliminates these claiming strategies, though the provision does not take effect for six months. In addition, people who are eligible for Social Security, generally those 62 and older, can opt into one of these strategies if they wish.

Firvida said the end of the claiming strategies will disappoint some people who had hoped to use them, but noted that those people tend to be more affluent, and thus better able to cope with the change.

(The Center for Retirement Research experts also took that view, noting of "claim now, claim more later" that "the main beneficiaries of this strategy are two-earner couples, with a significant portion of the benefits going to those in the upper portion of the wealth distribution.")

Firvida also stressed that no one currently using these strategies or eligible to use them will be stopped. "Without question, we feel like this is a net win," she said. "The Medicare issue is a serious issue for millions of folks. I can't even compare 16 million Medicare recipients and 11 million disability insurance recipients to this loophole closing and no one being impacted. You can't even compare these things."

The budget deal is now signed into law, giving policymakers time to consider longer term fixes to Social Security and Medicare. Plenty of skeptics doubted that such a deal could be reached, and many more question whether substantive reform will pass. Still, the deal at least provides enough time for such work to begin.

"These are really good changes, common-sense policy reforms that are going to protect millions of retirees and disabled Americans from serious harm," said Johnson.