If you've lived and worked in both the U.S. and abroad, then you may have participated in two different social security systems. If this is the case, then you may see a reduced U.S. Social Security benefit due to the so-called Windfall Elimination Provision (WEP). This penalty can you reduce your benefits by as much as $448 per month (2018), for those who start their benefits at their full retirement age, 67 for most people. This means that if your Social Security benefits statement shows a benefit of $2,000 at age 67, you should then subtract up to $448 from this benefit if the WEP applies to you. The WEP applies to anyone who worked for an employer who did not participate in the U.S. Social Security system, including foreign corporations overseas as well as U.S. organizations, in some cases. This also impacts teachers, firefighters, and other U.S. government workers who are covered under another pension plan.
In order to qualify for U.S. Social Security benefits, you would have to have worked and contributed to Social Security for at least 10 years (40 quarters). If there’s a Totalization Agreement between the U.S. and your host country, then your contributions may be counted toward your U.S. benefits. Totalization Agreements are usually applicable to workers who are abroad for 5 years or less. If beyond 5 years, then contributions to your host country’s state pension plan are likely mandatory. So far the U.S. has Totalization Agreements with more than 25 countries and each agreement may be different.^1
For your retirement, there may be strategies to reduce the impact of the WEP on your U.S. Social Security benefit. Taking an early Social Security benefit, say at age 62, would reduce the WEP penalty to $314, for example, while waiting until age 70 the WEP would increase to $556.^2 If you’ve contributed to the U.S. Social Security for 30 years or more, then the penalty is reduced significantly.
There is currently federal legislation proposing to repeal the WEP: H.R. 6933, the Equal Treatment of Public Servants Act of 2018. Contact your representative to support this initiative.^3
At Eureka Wealth Management, I help you plan for retirement while keeping Social Security in mind. I also advise on investments, insurance, and tax & estate strategies. Call for a free, initial consultation at +1(760) 537-0791 or online at eurekawealthmanagement.com/expats. Consult your tax advisor with questions about the tax treaty between your host country and the U.S.