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Budget Bill’s Ending of Social Security File-and-Suspend Strategy ‘Not All Bad’

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While retirement planning experts continue to air complaints about the budget deal passed by the House Wednesday, one retirement expert is arguing that the bill’s gutting of the popular file-and-suspend Social Security claiming strategy is “not all bad.” Meanwhile, a pension advocate accused legislators of hiking pension premiums in order to use the defined benefit retirement system as a piggy bank.

The bill could come up for a Senate vote as early as Friday morning.

Planner Michael Kitces and Boston University economics professor Laurence Kotlikoff both slammed the Social Security changes in blog posts on Wednesday, with Kotlikoff calling the changes “devastating.”

But Jamie Hopkins, associate director of the American College’s New York Life Center for Retirement Income, wrote in his Thursday Forbes blog that while the gutting of the file-and-suspend strategy under the budget bill will mean “reduced benefits,” which will “have a negative impact on many people relying upon these Social Security payments,” he sees the changes as also “beneficial to the Social Security system and to the American people.”

Why? Two reasons, Hopkins argues. First, Social Security claiming strategies “had become incredibly complicated with the ‘file and suspend’ system in place,” he writes. “The budget agreement will remove a lot of the claiming strategies by extending the deemed filing rules up to age 70, simplifying the Social Security claiming decision for millions of Americans.”

Second, ending file and suspend is “the first major change to a Social Security system that is in grave need of updating,” Hopkins says.

He cites the most recent Social Security Trustee Report, which warned that Social Security would run out of money by 2033 and only be able to meet roughly 77% of its future obligations at that point. 

“While more is still needed to fix the Social Security system, this move shows that the government is not afraid to make the tough decisions necessary to ensure the long-term success of the program,” he said.

James Klein, president of the American Benefits Council, complained after the budget bill passed that for the third time in four years, Congress has chosen to “hike pension premiums to pay for unrelated spending priorities, without regard for what it means to employers, workers and retirees.” The Bipartisan Budget Act of 2015, H.R. 1314, raises the premiums that employer sponsors of pensions must pay to the government’s Pension Benefit Guaranty Corp.

Said Klein: “Raising premiums every time Congress needs several billion more dollars must stop – and stop now.”

The current $64 flat-rate premium for 2016 jumps to $69 in 2017 under the budget bill. The variable premium rate, currently $30 per $1,000, will be raised by $3.

The flat and variable rate hikes are “both bad,” an ABC spokesperson told ThinkAdvisor Thursday, “but the flat rate is worse because you have to pay it no matter what – you can’t avoid it by funding up your plan, and unlike the variable, there is no cap.”

Klein added that policymakers “need to stop using employer-sponsored plans as a piggy bank,” noting that the “timing” of the provision to hike rates in the budget bill “is particularly baffling since the PBGC’s recent Fiscal Year 2014 Projections Report confirmed that the financial condition of the single-employer pension program has significantly improved and has ample assets to pay benefits well into the future.”

By “continually increasing premiums – including on fully funded plans – Congress and the President are compelling more and more employers to exit the system, which shrinks the premium base on which the PBGC relies,” Klein said.

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