9 Factors U.S. Expats Should Know About Social Security Benefits
American expats working and retiring abroad may receive Social Security benefits if they are eligible. However, there are several issues that Americans abroad must first consider that can impact the total amount of benefits received. We address common issues American expats encounter when receiving U.S. Social Security benefits abroad, as well as Social Security strategies to help maximize your wealth.
Social Security Basics
Social Security is an important source of retirement income for many Americans. Workers pay into the system while they’re employed, and employers pay matching contributions. In turn, Social Security benefits are then available to support workers and their families in retirement, including foreign spouses.
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 don’t provide a comfortable standard of living but can be a vital supplementary income stream in addition to other pensions and retirement accounts.
For 2023, Social Security beneficiaries are set to receive an 8.7% cost-of-living adjustment (COLA) — the largest COLA in more than 40 years. If you’re an expat currently receiving benefits or approaching eligibility, it’s important to understand your options.
1. Can U.S. Expats Get Social Security?
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 or credits (10 years).
Most people apply for U.S. Social Security retirement benefits when they reach full retirement age (FRA), 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. After age 70, your monthly benefit stops increasing, so there is no reason to delay past 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. Click here for the full breakdown showing the effect of early versus delayed Social Security benefits.
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.
2. When Should Expats Start Taking Benefits?
American expats should consider several issues before taking Social Security payments. For example, if a retiree worked part of their career in another country, understanding bilateral social security treaties is essential. These treaties will indicate if time working abroad will count toward the 40 credits required to receive U.S. Social Security system benefits.
Additionally, through Social Security’s Windfall Elimination Provision (WEP), American expats may find that their U.S. Social Security retirement benefits are reduced because of contributions made to foreign pension systems while working abroad. The next two sections provide a brief overview of these two major issues and how they affect retirement planning for Americans abroad.
3. Bilateral 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 governmental social safety net program in a country with which the United States has a bilateral social security agreement, they may still be able to obtain U.S. Social Security retirement benefits. The bilateral agreements that permit this are specifically referred to as totalization agreements.
As of 2023, the United States has totalization agreements with 31 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.
4. Social Security Benefit Protection for Expats
The Social Security benefit gap can occur if an American expat is working in certain countries with no totalization agreement. For example, if a 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 thus be denied the benefits from both countries although they paid into both social security systems. 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 that system’s social insurance program, but there’s enough combined time to qualify for one country’s social security program, then each country will pay out its proportionate share of the retirement benefits the employee earned.
5. 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 2023, on average, someone who begins taking Social Security benefits at age 62 will receive 30% less per month than they would if they had waited until their full retirement age of 67.
After paying into the system for decades, it might be 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.
6. When Should You Start Taking Social Security Benefits?
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’ll receive them. If you retire later, you’ll get benefits for a shorter period of time, but the monthly amounts will be larger to make up for the months when you didn’t receive anything.
After deciding when to begin benefits, receiving Social Security payments largely depends on your country of residence and the method used to set up the payment with the U.S. government. You’re able to receive payments in most foreign countries where you may retire abroad.
However, you may wish to use an American bank account to receive these payments, both for the security of the U.S. banking system and for reasons related to managing your foreign exchange risk and rate. Money in any U.S. account can then be withdrawn in a foreign country or transferred to a local country bank account via wire transfer at the time and exchange rate most convenient or favorable to the retiree living abroad.
7. Can You Maximize Benefits?
Most people apply for U.S. Social Security retirement benefits when they reach full retirement age (FRA), 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’s possible to begin receiving retirement benefits earlier than full retirement age (as early as age 62). After age 70, your monthly benefit stops increasing, so there’s no reason for further delay.
If a decision is made to receive benefits early, benefits are reduced a fraction of a percent for each month before full retirement age. This chart provides a full breakdown showing the effect of early versus delayed Social Security benefits.
When a decision is made to receive benefits later, the benefits are increased each month after full retirement age. Thus, even though someone is eligible for Social Security benefits, an overall analysis of the retiree’s finances is required to decide when is best to begin receiving payments.
8. Does Expatriation Affect Your Ability to Receive Social Security Benefits?
You can still get U.S. Social Security retirement benefits if you expatriate, so long as you have the minimum credits required. Expatriation renounces your U.S. citizenship and/or U.S. tax residency, but your Social Security number — and related benefits — stay intact.
9. What Happens if You Become Incapacitated or Unavailable to Receive Your Benefits?
In the unfortunate event of your incapacitation or unavailability to receive benefits, you can’t use power of attorney (foreign or U.S.) to send your U.S. Social Security retirement benefits to your guardian or caretaker family member. Because of this limitation, it’s important to plan ahead. Foreign countries and non-U.S. citizens won’t be as familiar with how U.S. Social Security works or doesn’t work in your overseas context.
At Creative Planning International, we understand the unique challenges faced by Americans living outside the United States. We undertake comprehensive analyses for our clients, helping them plan and navigate their specific retirement scenario with Social Security benefits in mind. The results will be incorporated into an overall integrated financial plan and investment strategy. For more information regarding your personal financial situation, request a meeting with a member of our team.
