Coordinating Social Security Benefits For Those Who Lived Or Retire Abroad

Dec 29, 2020 / Amanda Chase, Horsesmouth Assistant Editor

For many Americans, Social Security income plays an integral role in retirement planning, and while retirement planning is generally straightforward for Americans with income solely from US employment that pays into Social Security, the situation becomes more complex when income from multiple countries is involved. As working in a foreign country may not count towards US Social Security benefits, either reducing benefits or even rendering the worker with insufficient quarters of coverage to be eligible for Social Security benefits at all. In addition, receiving non-US pension or foreign Social Security benefits can impact US benefits, and there is the potential for double-taxation of benefits when more than one country seeks to tax the same individual (the foreign country because the US citizen lives there, and the US because it taxes all citizens on all of their income worldwide!).

Totalization Agreements are currently in place with 30 countries and serve not only to eliminate double taxation (i.e., taxes paid by employers and employees in both the US and the foreign country) of the same income being taxed for Social Security programs by more than one country but also to coordinate the accrual of worker’s benefits when they have been employed in multiple countries. These agreements also typically include a “detached worker” provision that exempts an employee from their local (temporarily-foreign-country) Social Security taxes for up to five years while continuing to pay into their own national Social Security program.

The Windfall Elimination Provision (WEP) is another consideration to take into account when planning for an individual’s Social Security benefit when they have years of service abroad. As while the WEP was initially established to more fairly adjust Social Security benefits for workers who earned income eligible for Social Security benefits alongside other income from US state and local government jobs that were not covered by Social Security, it also applies to individuals who receive both US Social Security benefits and a foreign pension benefit that does not pay into the US Social Security system. The WEP prevents workers who receive benefits from a non-covered plan from receiving more US Social Security benefits as though they were long-time lower-wage earners.

Ultimately, cross-border retirement planning can be a complex yet rewarding area that financial advisors can address with clients who have earned income from more than one country. By understanding the role of international tax treaties, Totalization Agreements, and the social security benefit systems offered by other countries, financial advisors can help their cross-border clients optimize their retirement income and Social Security benefits.

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