Social Security is an important source of retirement income for many Americans. Workers pay into the system while they are employed and employers pay matching contributions. Social Security’s guaranteed benefits are then available to support workers and their families in retirement. The size of a monthly retirement benefit largely depends on a retiree’s earnings history, and how old a retiree is when they first begin taking benefits. Benefits alone generally do not provide a comfortable standard of living, but can be a vital supplementary income stream in addition to other pensions and retirement accounts.
American expats working and retiring abroad may receive Social Security benefits if they are eligible. However, there are several special issues that American expats must first consider such as bilateral social security agreements and foreign pension plans that can impact the total amount of benefits received. This Creative Planning International Research note addresses common issues American expats and their foreign spouses encounter when receiving U.S. Social Security benefits abroad. Social Security strategies to maximize wealth accumulation with this important retirement asset are also discussed.
Receiving Social Security as an American Living Abroad
Americans retiring abroad may receive U.S. Social Security benefits outside the United States as long as they are eligible. In addition, Americans who spend parts of their careers working in another country may also be eligible to receive U.S. Social Security benefits and foreign government pensions. To receive Social Security retirement benefits, a worker must have contributed to the Social Security system for a minimum cumulative total of at least 40 quarters (10 years).
Most people apply for U.S. Social Security retirement benefits when they reach full retirement age, which is 65 years of age for people born before 1937, and gradually increases to 67 years of age for people born after 1960. It is possible to begin receiving retirement benefits earlier than full-retirement age, beginning as early as age 62. Retirement benefits must begin no later than age 70. If a decision is made to receive benefits early, benefits are reduced a fraction of a percent for each month before full retirement age. When a decision is made to receive benefits later, the benefits are increased each month after the full-retirement age. Thus, even though someone is eligible for Social Security benefits, an overall analysis of a retiree’s finances is required to decide when it is best to begin receiving payments. This topic is further discussed in the last section of this article.
American expats must consider several other issues before taking Social Security payments. If a retiree worked part of their career in another country, understanding bi-lateral social security treaties is essential. These treaties will indicate if time working abroad will count toward the 40 credits required to receive Social Security system benefits. Additionally, American expats may find that their benefits are reduced because of contributions made to foreign pension systems while working abroad through Social Security’s Windfall Elimination Provision (WEP). The next two sections provide a brief overview of these two major issues and how they affect retirement planning for Americans abroad.
Bi-Lateral Social Security Agreements and Totalization Agreements
Many American expats find themselves working a large portion of their careers abroad. If an expat worked less than 40 quarters under Social Security in the United States, but also contributed to an equivalent social program in a country with which the United States has a bilateral social security agreement, they may still be able to obtain Social Security retirement benefits. The bilateral agreements that permit this are specifically referred to as Totalization Agreements.
As of 2021, the United States had entered into Totalization Agreements with 30 countries. Totalization Agreements have two main purposes. First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay social insurance taxes to both countries. Second, the agreements fill gaps in benefit protection for workers who have divided their careers between the United States and another country.
The Social Security benefit gap can occur if an expat is working in certain countries with no Totalization Agreements. For example, if the U.S. citizen is working in a country without a Totalization Agreement, they may not work enough quarters to qualify for the social insurance benefits of either the United States or the foreign country. They will be denied the benefits from both countries, although they paid into both of them. This occurs even though their total combined years in both countries would meet the requirements for one or both countries’ retirement systems.
A Totalization Agreement, on the other hand, tracks the total quarters worked in both countries. If insufficient time is put into either system to qualify exclusively for its social insurance program, but enough combined time would qualify for one country’s social security program, then each country will pay out its proportionate share in retirement of the benefits that the employee earned. This is very beneficial for an American expat who works in one of the 30 countries (mainly Western Europe) with such Totalization Agreements.
Windfall Elimination Provision (WEP) Could Change Social Security Benefit
The Windfall Elimination Provision (WEP) is also something that American expats working abroad and expecting to receive Social Security benefits must become familiar with. The WEP affects American expats if they earned a pension in any job where they did not pay U.S. Social Security taxes and also worked in other jobs long enough to qualify for U.S. Social Security benefits. Typically, this would be Americans who work abroad for a foreign employer, but also contributed to the U.S. Social Security System in the past.
Without the WEP, the worker would effectively be double-dipping by receiving full benefits from both plans. In an extreme case, a retiree could work two-half careers and get almost two full pensions. The WEP is used in determining all benefits on the record, both for the primary beneficiary and any auxiliaries. This includes an effect upon the maximum total benefits paid on the record as well. Since the WEP does not apply after the death of the primary beneficiary, it is never used for Social Security survivor benefits.
The Social Security Administration has a website that will allow an American expat to enter their earning history into a calculator to derive the potential deduction that might occur due to the Windfall Elimination Provision. However, the resulting reduction cannot be more than 50% of your pension based on earnings after 1956 on which you did not pay Social Security taxes. For comprehensive retirement planning, American expats must calculate how the Windfall Elimination Provision will affect their retirement plans and adjust accordingly.
Can Foreign Spouses Receive Social Security?
Many American expats end up marrying a foreign spouse. Depending on the situation, the foreign spouse may be eligible for spousal and survivor social security benefits. The next section gives a brief overview of general rules regarding the treatment of foreign spouses for determining Social Security benefits. For more detailed information concerning a specific situation, it will be essential to visit the U.S. Social Security Administration website to check for regularly updated policy and tax treaty changes.
The general rule is that with any spouse who is not a U.S. citizen or green-card holder, Social Security payments to them must stop if the spouse has been outside of the U.S. for six consecutive calendar months. However, there are many exceptions that could easily qualify a non-American spouse to receive Social Security if the American spouse is receiving Social Security benefits. First, non-citizens may receive social security benefits abroad if they lived in the United States for at least five years as a married couple. Second, if your spouse is a resident or citizen of certain countries that have social security agreements, then they can receive benefits. Importantly, a foreign spouse will generally be able to receive Social Security survivor benefits.
For more information, including a full list of countries exempt from the residency requirement, you can contact the U.S. Social Security office nearest you or your closest U.S. Embassy Federal Benefits Unit with more questions. In addition, you can go to the U.S. Social Security Administration’s online publication entitled “Your Payments While You are Outside the United States.”
Maximizing Retirement Wealth with Social Security Planning
Deciding when to start Social Security payments requires a comprehensive analysis of all retirement assets. Many workers decide to claim Social Security as soon as possible, but they may regret that decision later in retirement. Claiming benefits early at age 62 provides valuable retirement income, but it also triggers a reduction in monthly payments because retirees collect them over a longer period of time. As of 2021, someone who begins to take Social Security benefits at age 62 will receive 25% less per month than they would if they had waited until their full retirement age 66.
After paying into the system for decades, it is tempting to start your Social Security payments as soon as you can, but the decision to sign up for benefits deserves careful consideration. Taking the money early might seem attractive, but it means settling for a lower monthly payment, which could lead to lower overall social security payments during a retiree’s lifetime. The optimal claiming decision for each individual depends on many factors, such as total liquid assets, expected mortality, employment opportunities, and health concerns.
As a general rule, early or late retirement will give you about the same total Social Security benefits over your lifetime. If you retire early, the monthly benefit amounts will be smaller to take into account the longer period you will receive them. If you retire later, you will get benefits for a shorter period of time but the monthly amounts will be larger to make up for the months when you did not receive anything.
After deciding when to begin benefits, receiving Social Security payments largely depends on country of residence and the method used to set up the payment with the U.S. government. Since there are some restrictions on using a foreign bank account, the best solution is to use an American bank account to receive these payments. Money can then be withdrawn in a foreign country or transferred to a local country bank account via wire transfer.
In closing, the U.S. Social Security Administration is not a financial advisor and will not provide detailed information on strategies for maximizing Social Security benefits. To make an informed choice about beginning Social Security benefits, it is essential to review a retiree’s household budget, health, financial savings, life insurance, and plans to work in retirement. With a complete financial picture in mind, strategies to maximize Social Security benefits can be made.
In addition to these basic concerns, Creative Planning International understands the unique challenges faced by Americans living outside the United States. We undertake comprehensive analyses for our clients as to the best time for them to being taking Social Security payments, including the effects of Totalization Agreements and relevant Windfall Elimination Provisions. The results will be incorporated into an overall integrated financial plan and investment strategy.