5-Minute Read
Maybe it’s a little ironic to release a blog about expats on arguably the most patriotic day of the year.
But no matter where you end up living, retirement income planning is important. It also often involves discussions about Social Security. In an earlier blog, Your Social Security Statement May Not Tell the Full Story, I emphasized the need to carefully analyze the figures provided in your benefits statement. Some situations may result in an over- or understatement of the benefits you will receive.
In this piece, I want to delve deeper into this topic for those of you planning to work or retire abroad, as it can significantly impact your financial plans. I’d like to thank Ashley Murphy and the Global Financial Planning Institute for sharing many of the insights you’re about to read.
Navigating the logistics and strategy for claiming Social Security (SS) is complex, even for US residents. This complexity increases substantially when relocating internationally. While I can’t cover all the nuances, I hope to highlight the key points that will help you better understand the landscape and identify important questions to answer for yourself or discuss with your financial planner.
- If I’m Still Working, Will my SS Benefits be Reduced?
- How Does my US Legal Status Impact my SS Benefits?
- What are the Logistics of Receiving Social Security Abroad?
If I’m Still Working, Will my SS Benefits be Reduced?
This is often the key question, and the general answer is it depends. Let’s start by looking at the three situations where you are unlikely to be affected by working abroad.
- You are temporarily outside the US, but you continue to pay US Social Security taxes
- You’ve already had 35 years of high earnings in the US (the formula for calculating benefits will be maxed out if you never contribute again)
- You work in a country with a “Totalization” Agreement with the US
If none of the above situations apply to you, you may get reduced SS benefits or pay double taxes while accruing benefits.
How do Totalization Agreements Work?
Totalization agreements are bilateral treaties coordinating US Social Security with similar programs in other countries. They serve a couple of purposes:
- Helps taxpayers avoid double taxation.
- They “totalize” contributions to both the US system and the other country’s system.
The US requires a minimum of 40 quarters of work (10 years) to qualify for SS benefits. For example, in a totalization scheme, you could have 28 quarters in the US, 6 in Italy, and 6 in Spain.
The US currently has around thirty totalization agreements in place. Most of these agreements are with European countries but are also in place with Canada, Brazil, Australia, and Japan. As might be helpful to many of my clients, India is not one of the countries on this list.
If you’re an expat in one of the countries not covered by an agreement, you may be faced with double taxation. That means you could face US Social Security taxes as well as taxes for the local country’s equivalent. In practice, some employers trying to incentivize expats may increase top-line pay accordingly to give them an equivalent after-tax benefit.
Beware a Different Kind of Windfall
There’s another way your US Social Security income could be reduced. If you receive a foreign pension at the same time as US Social Security income, your SS benefits may be reduced due to the Windfall Elimination Provision (WEP).
The purpose of the WEP, established about forty years ago, was to prevent US government workers from receiving both public pensions and overly generous Social Security benefits. These rules may also apply to pensions received from outside the US. Basically, if you earn money outside the US that is not subject to Social Security taxes, your Social Security income could be reduced.
The maximum reduction is 50 percent of the foreign pension amount. However, if you have worked in the US for more than 30 years, you will not be subject to this reduction. Additionally, if you have worked in the US for 21 to 29 years, you may be eligible for a partial exemption.
If you receive a foreign pension, you may be exempt from the WEP rules altogether if there is a totalization agreement in place, as mentioned earlier.
How Does my US Legal Status Impact my SS Benefits?
Your legal residency status in the US does not affect your eligibility for Social Security benefits. This means you do not need to be a US citizen or a green card holder to be eligible as long as you are vested in Social Security.
However, you may encounter some challenges if you are a non-US citizen or have renounced your US citizenship before claiming Social Security. The outcome may depend on the specific country to which you are relocating.
The Payments Abroad Screening Tool can help you determine if any restrictions will apply. One potential restriction is the 6-month rule. This rule states that “a non-US person residing outside the US for six full calendar months cannot be paid benefits beginning with the seventh month of his/her absence.“
If this restriction applies to you, you must return to the US every six months and stay for one month if you want your Social Security benefits to continue. This would be logistically difficult for most people, even those who are financially and physically able to make that type of frequent travel.
Fortunately, I have not yet seen this restriction apply to a client, as there are often exceptions. These exceptions could be a totalization agreement, another treaty, or if married, a spouse’s US work history.
On a related note, a general rule is that a non-US spouse should be eligible for benefits based on the record of a US person. However, you may face an additional requirement. The non-US spouse must have resided in the US for at least five years and been married to the US worker during that time. This can be an important rule to see if it applies to your situation. If so, it may help you better plan when you will leave the US.
What are the Logistics of Receiving Social Security Abroad?
Can I Receive SS Benefits without a US Bank Account?
The good news here is the answer is almost always yes. If you’re a US citizen living overseas, you can elect to receive your benefits in a US or non-US financial institution.
If you live overseas and no longer have a US bank account, the main program you will use is International Direct Deposit (IDD). Use the appropriate form for your country. The US Treasury prohibits payments to those living in certain countries, such as Iran, North Korea, and Cuba.
Suppose you receive payments to a foreign bank account. In that case, the US dollar amount of your benefit will be converted to your local currency at the daily international exchange rate at the time of payment.
Where can I Receive Support?
You’ve probably noticed SS Administration offices at or near the city where you live. However, you won’t see these offices outside of the US. Instead, you will work with the Office of Earnings & International Operations (OEIO). This group is assisted by the Department of State’s embassies and consulates worldwide.
You’ll need to look up the location of the OEIO field office for your target country. When you contact them, they will ask various questions about your family, marital, and work status before determining your benefits.
If you’ve made it this far, you should better understand the landscape and logistics involved in receiving SS abroad. You’ll also need to consider some of the issues non-expats deal with, such as when exactly to claim SS. For a primer on that, refer to another one of our pieces, The Top Four Questions I’m Asked About Social Security.
If you have comments or questions on this piece, please drop me a line at [email protected]
References
- https://krishnawealth.com/your-social-security-statement-may-not-tell-the-full-story/
- https://www.gfp.institute/
- https://www.ssa.gov/international/status.html#F
- https://www.ssa.gov/pubs/EN-05-10045.pdf
- https://www.ssa.gov/international/payments_outsideUS.html
- https://www.ssa.gov/foreign/foreign.htm
- https://www.ssa.gov/forms/ssa-1199.html
- https://krishnawealth.com/the-top-four-questions-im-asked-about-social-security/
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