How Social Security and Medicare just got stronger

The new federal budget bill President Obama signed into law earlier this week makes some crucial fixes aimed at strengthening the finances of Social Security and Medicare. While some people will receive reduced benefits with these changes, everyone wins when these programs are put on a sounder footing and obvious flaws are remedied.

Let's take a look.

Changes to Medicare

Absent the budget agreement, the 2016 premium for Medicare Part B would have increased significantly for many retirees -- from $104.90 to $159.30 -- due to the operation of "hold harmless" features that protect most retirees from decreases in their Social Security checks resulting from increases in Medicare premiums. The hold harmless feature would have gone into effect next year because Social Security benefits won't be getting the typical cost of living increase for 2016. So, the higher Medicare premium would have meant a lower Social Security check.

But the hold harmless feature doesn't hold for everyone. Retirees not held harmless are those who don't have Medicare premiums deducted from their Social Security checks, retirees who pay a surcharge on their Medicare premiums due to high income and retirees newly enrolled in Medicare Part B.

In effect, these retirees would have had to bear the higher cost attributable to the entire program. With the new law, retirees who aren't held harmless will pay $120 per month in 2016. That's the amount the Part B premium would have otherwise been for all beneficiaries in 2016 if the hold harmless features didn't apply.

Social Security disability benefits

The Social Security disability trust fund was projected to be exhausted in late 2016. If it had run out, checks to current disability beneficiaries would have been reduced. The new law reallocates a portion of FICA taxes to the disability trust fund in amounts sufficient to pay benefits until 2022. Current disability recipients can breathe a sigh of relief, at least until then.

Closing unintended loopholes in Social Security benefits

One of the most controversial features of the new law severely restricts two Social Security claiming strategies -- file and suspend and restricted application -- calling them unintended "loopholes." These features were enacted in 2000 in an effort to encourage older workers to continue working. Instead, savvy couples were using these features to boost the payouts they would receive over their lifetime.

Many people were surprised by the speed at which all these changes were adopted. But lawmakers and analysts have known for some time about the fixes needed for Medicare and the Social Security disability trust fund, so it's encouraging they were made without being held hostage by other political initiatives.

It should be no surprise that Social Security's long-term finances need strengthening. Lawmakers constantly request pricing of various benefit changes and tax increases that could shore up financing of Social Security's retirement benefits, and they have a menu of possible changes they can consider. They perceived that the loopholes mentioned above primarily benefited affluent retirees and that closing them will save several billions of dollars each year.

These may be just the first of additional benefit reductions and tax increases that will fall on those seen as capable of paying for an improved Social Security system.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.