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U.S. Expats’ Social Security and Overseas Retirement
The Social Security system was not originally meant for retirement income, yet many Americans have relied on it to support their income during their sunset years. The quantity of a monthly retirement benefit is determined by a retiree’s earnings history and the age of the retiree when they first begin receiving benefits. Benefits alone do not typically offer a reasonable quality of life, but they can be an important supplemental income stream in addition to other pensions and retirement investments.
Americans who retire outside of the United States may receive Social Security payments if they are qualified. To be eligible for Social Security retirement benefits, an employee must have contributed of at least 40 quarters (10 years) to the Social Security system. However, there are a few unique difficulties that American expats must first address.
Social Security and US Expat Taxes
Because US citizens and Green Card holders are generally compelled to pay into Social Security regardless of where they live or work, this is an issue that frequently leads to dual taxation. If an individual works for an American firm, both the employer and the employee are obliged to contribute to Social Security. In addition, self-employed businessmen must pay self-employment tax on net income generated, as well as contribute to US Social Security.
The challenge with this legislation is that many other nations also compel people to contribute to their social insurance systems to get benefits while residing there. As a result, numerous expats are taxed twice since they pay into both their host country’s social insurance scheme and US Social Security at the same time. To tackle the concerns of double taxation, the United States has signed agreements with several nations to identify which social insurance system an expat belongs to.
Bi-lateral Social Security Agreements and Totalization Agreements
The Internal Revenue Service (IRS) and other US institutions have implemented procedures to eradicate double taxation for US individuals residing abroad. Social Security Totalization Agreements are one way the US government intends to curtail double taxation on US expat taxes.
According to the IRS page Social Security Tax Consequences of Working Abroad, dual coverage and multiple contributions (taxes) for the same job are removed under a Totalization Agreement. In principle, the agreements ensure that you contribute social security taxes to just one country.
The United States has Totalization Agreements with 30 nations, the most recent additions being Iceland and Slovenia. These agreements are in place to decrease double coverage and taxes for persons working abroad, as well as to bridge gaps in benefit coverage for those who may live in both the United States and another area.
While the agreements abolish double taxation for expats living in those countries, many continue to pay into both systems while getting just one benefit. There are agreements in place with the following countries:
The territorial rule governs where an individual’s employment is derived under the Totalization Agreements. Other criteria considered in the agreements include where an expat was employed and their anticipated duration of stay in a foreign nation.
In principle, the agreements stipulate that if an individual is transferred abroad on a contract or does not plan to stay for more than three to five years, they will pay into their home country’s social insurance. Individuals will pay into the host country’s social insurance scheme for longer-term contracts or those who have no imminent plans to come back. There are several exemptions to these regulations, therefore expats should study the Totalization Agreement with their host nation.
Are Foreign Spouses Allowed to Claim U.S. Social Security?
A foreign spouse may be entitled for spousal and survivor social security benefits depending on the circumstances. The main rule is that if a spouse who is not a U.S. citizen or green-card holder has been outside the country for six consecutive calendar months, Social Security benefits must cease. However, there are several exceptions that may likely authorize a non-American spouse for Social Security benefits.
First, non-citizens may obtain social security benefits overseas if they lived in the United States as a married pair for at least five years. Second, if your spouse is a citizen or resident of a country with which there is a bilateral social security agreement, they may be eligible for payments. Significantly, a foreign spouse will be permitted to collect Social Security survivor benefits in most cases.
Social Security Planning to Maximize Retirement Wealth
When residing abroad, maximizing your social security benefits necessitates paying close attention to when and how you claim your payments. By planning beforehand how you will transfer your benefits to your foreign nation and currency, you can avoid large cutbacks in benefits due to bad currency exchange rates and hefty wire transfer fees. A long-term plan can help you determine whether collecting your social security benefits now or later will give you the best opportunity of optimizing those benefits over the course of your and your spouse’s lives.
Even if you can always get a check, the simplest and quickest method to obtain your benefits is to have a US bank account and set up direct deposit. In addition, there is a long array of international nations to which the SSA may be able to send direct deposits. Finally, costs should be a major criterion for selecting how to receive benefits, since banks typically charge exorbitant rates for currency exchanges.
The second point, when to begin Social Security payments, involves a detailed study of all retirement assets. Often employees opt to file for Social Security as soon as feasible, but they may eventually regret that decision later in life. Receiving benefits early at age 62 offers significant retirement income, but it also reduces monthly payments since pensioners receive them over a longer period.
In general, early, or late retirement will provide you with comparable total Social Security payments during your life. To account for a longer withdrawal time, early retirement leads to reduced monthly benefit amounts. Later retirement implies that it is for a shorter period, and the bigger monthly payments compensate for the benefit deferral.
Conclusion
International Social Security agreements may be advantageous for expats who are still working, retired, disabled, or deceased. For those who are still working, the agreements may eliminate the dual contributions to the Social Security systems of both the United States and another country. As for expats who are retired, disabled, or deceased but have worked both in the United States and abroad, the bilateral agreements may provide coverage for the worker or the worker’s family members.
For more information about the United States’ Social Security Totalization agreements program, you may contact the SSA at:
SOCIAL SECURITY ADMINISTRATION
ATTN: International Agreements
Office of Data Exchange, Policy Publications, and International Negotiations
4700 Annex Building
6401 Security Blvd.
Baltimore, MD 21235