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The Windfall Elimination Provision (WEP) and American Expats

May 22, 2023
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How Foreign Pensions Can Reduce Social Security Benefits

If you’re an American expat with a foreign pension, the Windfall Elimination Provision (WEP) may impact your Social Security benefits in retirement in an unexpected way.

Implemented in 1985, the WEP is part of a U.S. Social Security law that reduces the Social Security benefit an individual may get if they receive a pension from a job that did not pay Social Security taxes, such as a non-U.S. pension. Social Security benefit formulas are designed to provide a replacement income to lower paid workers. Because the formulas don’t take pension benefits into account, workers with a non-U.S. pension may appear to have a lower income and would therefore receive a higher percentage of Social Security benefits. The WEP was designed to eliminate the “windfall” of receiving full benefits from both a pension and Social Security.

So, how much are your benefits reduced if you’re an American taxpayer with a non-U.S. pension? To find out if the WEP may apply to you, consider the following.

Do I qualify to receive Social Security benefits?

In general, to be eligible for Social Security retirement benefits, a person must have earned at least 40 credits (with a maximum of four credits earned per year). For 2023, one credit is earned for every $1,640 in earnings. To calculate the amount of Social Security retirement benefits a person is entitled to receive, the Social Security Administration uses a formula that takes into account the 35 highest-earning years of a person’s career. However, the exact amount of the benefit will depend on a variety of factors, such as when the person starts receiving benefits, their age at the time they start receiving benefits and their earnings history.

A key factor in determining Social Security benefits for eligible individuals is one’s primary insurance amount (PIA). This formula involves a number of variables, including the individual’s average indexed monthly earnings, the individual’s first year of eligibility and the cost-of-living-adjustment (COLA). The WEP effectively reduces the PIA by a fixed percentage, which can vary based on the number of years of work not covered by Social Security and the individual’s earnings history. However, having accumulated 30 or more years of substantial earnings negates any reduction in benefits by the WEP.

Is the WEP applicable to my pension?

The original objective behind the introduction of the WEP in 1983 was to offset the advantage enjoyed by government employees who had earnings from non-covered pensions in addition to the full amount of their Social Security benefits during retirement.

However, it ended up affecting other types of pensions, such as foreign pensions offered by non-U.S. employers or state benefits of other nations, which also fall under the category of non-covered pensions. As a result, individuals who receive such non-covered pensions may face a reduction in their Social Security benefits due to the application of the WEP.

It’s worth noting that the WEP only applies to retirement benefits received by the primary beneficiary and does not extend to survivor benefits issued by the U.S. Social Security Administration.

Is there a bilateral social security agreement?

Despite the overriding effects of the WEP when it comes to lowering U.S. source benefits, bilateral social security agreements have been executed over the past four decades to establish a framework for cooperation between countries.

Bilateral social security agreements serve two primary purposes. The first is to prevent dual taxation on Social Security. This occurs when a worker from one country is employed in another country while being obligated to pay Social Security taxes to both countries on the same income. The second purpose is to provide protection for workers who have split their careers between the United States and another country by bridging any gaps in benefit coverage. By doing so, these agreements help to ensure Social Security benefits are maximized.

Under these agreements, the credits earned in one country can be added to the credits earned in the other country, which can help individuals meet the eligibility requirements for benefits in both countries. Additionally, these agreements ensure the benefits paid by one country aren’t reduced or eliminated by the other country, providing greater financial security.

Countries With Social Security Agreements
BelgiumHungarySlovak Republic
CanadaIrelandSouth Korea
Czech RepublicJapanSweden
FinlandNetherlandsUnited Kingdom

Do I qualify for a WEP reduction?

To determine the potential impact of the provision, individuals can use the WEP online calculator. It’s worth noting that the reduction in Social Security benefits is limited to 50% of the pension amount based on earnings not covered by Social Security. However, the reduction typically does not reach that threshold.

Therefore, for comprehensive financial planning, beneficiaries of non-U.S. pensions must assess how the WEP will impact their retirement plans and make any necessary adjustments.

Need help navigating your Social Security benefits and learning strategies to reduce the impact of the WEP? Creative Planning International is here to help. We understand the unique challenges faced by U.S. expats and cross-border families. We can help you maximize your wealth and avoid costly mistakes. For more information about our services for U.S. expats, request a meeting with a member of our team.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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