Cross posted from ExpatAmi
On 04/03/2012, the Social Security Administration wrote that when I retire at the age of 67, I’ll get a mighty monthly Social Security benefit of $495, partially in exchange for the time spent serving loyally in the United States military. If I was 67 today, then this benefit would enable me to afford to rent the cheapest one bedroom apartment in San Francisco for only $370 per month, according to WalkScore, and have $125 left over for food, drinks, electricity, health care, transportation, taxes, clothing, etc.
This would be the case if there was no expat penalty, also known as the “Windfall Elimination Provision“ (WEP). On WEP, the Social Security Administration writes:
If you work for an employer who does not withhold Social Security taxes from your salary, such as a government agency or an employer in another country, the pension you get based on that work may reduce your Social Security benefits… The Windfall Elimination Provision primarily affects you if you earned a pension in any job where you did not pay Social Security taxes and you also worked in other jobs long enough to qualify for a Social Security retirement or disability benefit.
According to SSA Publication No. 05-10045, the Windfall Elimination Provision does not apply if:
- You are a federal worker first hired after December 31, 1983;
- You were employed on December 31, 1983, by a nonprofit organization that did not withhold Social Security taxes from your pay at first, but then began withholding Social Security taxes from your pay;
- Your only pension is based on railroad employment;
- The only work you did where you did not pay Social Security taxes was before 1957; or
- You have 30 or more years of substantial earnings under Social Security.
This means that WEP applies to my monthly benefit of $495. So, if I was 67 in 1990, my monthly Social Security benefit of $495 would be cut by $178 (see chart), since I was only allowed to contribute to Social Security for less than 20 years, to $317. This would mean that I’d be able to rent the cheapest 1 bedroom apartment in San Francisco if I borrowed $53 from the bank. However, I’d have nothing left for food, drinks, electricity, health care, transportation, taxes, clothing, etc.
Of course, today is not 1990 but rather 2012. In 2012, the expat Social Security penalty is $383.5 (see chart). So, if I was 67 today, then my monthly Social Security benefit would be a mighty $112. This would increase the borrowed money needed to rent the cheapest one bedroom apartment in San Francisco to only $258 per month. Never mind food, drinks, clothing, utilities, transportation, health care and taxes as well as loan payments and interest, given that nobody would refuse to lend money to an old dude with no job and no money to pay it back.
Yet, I’m not 67 and have another 20 or so more years to go. Well, in the last 20 years, the expat penalty increased by $205.5. So, in 2032, the expat penalty will probably be around $383.5+$205.5=$589. In 2032, my rocking $495 monthly Social Security benefit will be reduced by $589 to -$94, meaning that I’ll only need to get a loan for $464 per month to rent the cheapest one bedroom apartment in San Francisco, assuming that rental rates don’t increase. Now, that’s one serious benefit!
But, no worries. Uncle Sam generously “protects” you by only penalizing a maximum of 50% of your Social Security. Never mind the fact that US expats are denied voluntary participation:
If you get a relatively low pension, you are protected. The reduction in your Social Security benefit cannot be more than one-half of the amount of your pension that is based on earnings after 1956 on which you did not pay Social Security taxes.
SSA Publication No. 05-10045
Oh, that sounds so lovely and refreshing, especially when the remaining 50% gets double-taxed with citizenship-based taxation. So, I’ll get a whooping $247.5 per month when I retire at the age 67, $2265 less than what will be paid to the average politician. I’ll only need to get a loan for $122.5 per month to cover the rent of the cheapest one bedroom apartment in San Francisco, assuming that I don’t need to eat, drink, wear clothing, visit the doctor, ride on the Bart or pay taxes. Not bad, eh?
Suppose that I lived in Thailand. Uncle Sam has documented that American Expats in Thailand may get a Thai social security benefit from between $50 to $463 per month. So, a Thai double wammy expat penalty free pension of $463 added to my generous American Social Security expat penalty reduced benefit of $247.5 would give me a rocking double-taxed $710.5 to rent the cheapest one bedroom apartment in San Francisco for $370, loan-free, while having enough change for a bud light (I would need it), some french bread, a pair of pants and maybe even a Bart ticket tax free? Never mind health care. Luckily enough for my American-retire-to-America argument, I don’t live in Thailand and thus I might actually be able to rent the cheapest one bedroom apartment in San Francisco, unless the value of the Franc drops to equal that of a baht.
If I was 67 in 1990, Swiss Social Security would range from $895 to $1791, using current figures exchanged in 1990 rates. Yet, having served in the US military, the Swiss expat penalty would reduce my monthly benefit to between $692 to $1385. So, the max possible Social Security benefit I could receive in 1990 would be $1633, $880 less per month than what the average American politician will receive. If I was 67 today, Swiss Social Security would range from $1206 to $2413. Yet, having served in the US military (did I already say that?), the Swiss expat penalty would reduce my monthly benefit to between $931 to $1864. So, even with the current low value of the dollar and high value of the Swiss Franc, the double-wammy expat penalty will reduce my total Social Security benefit to between $1178 to $2112 as of today, which is between $401 to $1335 less than the average American politician benefit, even if I contributed more than the max contribution over 30 years and exchange rates were at their best levels as they are today. As for how the economic situation will be 20 years from today, we have yet to see.
Now, the absolute best case scenario double-wammy reduced expat penalty benefit of $2112 may sound like a good chunk of cash in the shoes of the average American politician. Yet, the Insight Center for Community Economic Development writes that a senior citizen in San Francisco needs a bare minimum of $2273.5 per month to cover rent, food, transportation and out-of-pocket medical bills. The Big Mac Index further shows that Switzerland currently has the most overvalued currency and an American senior citizen in Switzerland earning less than $2287 per month would be living below the povery line. This suggests that the probably is good that American senior citizens benefited with the double-wammy expat penalty will need more than solely social security to escape poverty regardless if they live abroad or are financially assisted by a foreign government to live in America.
Well, I called Social Security to inquire if these calculations were correct and was informed that the WEP penalty only applies to government employees working abroad, contrary to what is claimed in the documentation provided by the Social Security Administration and by many financial experts. The Social Security Administration also said that my monthly benefit at the age of 67 would be $613. Yet, this is also incorrect. The Social Security Benefits Calculator writes that:
delay starting your benefits until age 70, your monthly benefit will be about…$613.00.
So, the Social Security Administration informed me incorrectly on the amount that I would receive when I’m 67 and also incorrectly on the WEP expat penalty. Well, gee, thanks guys. By the way, the Swiss Social Security also misinformed me on my 10 year penalty gap, incorrectly telling me that I could not reduce 5 years of it, which I later learned (to late) to not be the case. Gotta love these government folks and their future planning expertise! Unlike the US, Switzerland did provide me with the opportunity to avoid the expat penalty via voluntary participation. Yet, with an average annual income of $13’646 at the time, I was much more concerned with college debt, debt interest, tuition, rent payments, food, taxes and all the other many expenses college kids have to live with. Fair enough. These days, I can fill the gap with personal retirement savings based on foreign-earned income, savings which Uncle Sam seeks to triple-tax. I’ll write more on that later as I dig into the details of it.
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This information is based on my personal experiences and research on the matter. Each individual free to process this information according to their own choosing and I welcome any questions or challenges to the facts and figures provided. It is not my intent to inflame, anger, humiliate, misrepresent, misinform or to mischaracterize anyone. This information is non-partisan, religiously void and patriotically neutral. I’m simply describing the situation as-is according to how it occurs with the intent of gaining knowledge and sharing such with others.
By the time the late baby boomers retire there won’t be much or any Social Security left, as the United States has already spent the money. So my advice to expats would be to eliminate your US citizenship so that you don’t have to pay taxes to pay for other people’s benefits (i.e., those still resident in the United States). Because those of us who are living outside the United States will never receive our benefits even if we paid into the program.
You also forfeit any social security benefits derived from income top-up to calculate benifits, for some years of military when some income was subject to income tax but not considered for social security. these include payments in kind, subsistance and housing allowance,*
*Expat US citizens are not subject to Social Security taxation, as I understand it, with two notable exceptions.
1. If they live and work abroad for a US employer which includes all of its expat employers in US Social Secirity and pays the employer portion of the SS tax, then the expat employer is covered and also subject to the US Social Security tax.
2. If the US citizen expat is self employed, then he is subject to US social security tax (self employment tax). It is not optional. There are agreements between the US and a few foreign countries which exempts the US citizen self-employed expatriates resident in that foreign country from this US tax. The person himself has no choice in the matter.
Incidentally during the years when I lived and worked in Brazil for a Brazilian employer I was subject to and paid Brazilian SS taxes. However since my time of residence and payment of Brazilian SS taxes was less than 8 years, I do not qualify for any Brazilian SS retirement benefits
Hold on, do former citizens still get social security? I know that that is logical, but I’m just amazed that Levin and Schumer haven’t slipped in a bill to do away with Social Security payments to all former citizens.
Anyway, I only ever had a summer job in the US in my teens, so I imagine that my grand haul of a couple thousand dollars split over a few years would amount to exactly nothing in social security payments 🙂
@Roger
For the first 5 years of my wife’s life in Canada, she worked first for Amoco Petroleum, and then Chevron Standard in Calgary. When she became a Canadian citizen in 1974, I believe that stopped — but I’m not entirely sure. She left Chevron in 1978 — and it may well be that SS tax was paid on her behalf for all of that time. She definitely had no choice in the matter. That means she could apply for and get an SS pension — but she has deliberately refused to do that because she wants absolutely NO ties with that country any more.
@Don
Not just former citizens, but former green card holders as well. My 94-year-old mother gets a monthly SS cheque. That, unfortunately, means she will be targeted by her bank as a US person, and I’m not sure how that will play out. My guess is that SS will start withholding 30%. As it is now, she pays Canadian tax on it — but that won’t impress the IRS.
@Arrow,
That is an interesting point — being targeted by banks as US citizens if US citizens abroad get a US Social Security cheque! It never ends.
*@don,
There is no requirement that a person be a US citizen in order to receive US social security benefits. When we lived in Brazil US social security benefits were being received by many Brazilians who had lived and worked in the US, but who had returned to Brazil to spend their retirement days. Most had worked as green card holders in the US, having never become US citizens.
In those days their social security retirement benefits were sent via diplomatic pouch to the US consulate in Rio de Janeiro where these persons came once per month, which the checks arrived, to pick up their social security checks. This was in the days before direct-deposit so they received paper checks. I don’t know if this was a general practice for social security recipients living outside of the US or whether, depending on the reliability reputation of the local mail system, they may have been mailed directly to the foreign recipients in some countries but sent to consulates for personal pick-up in others. I had visited with some of them standing in line to pick up their checks when I had happened to go to the consulate on “Social Security Payday.”
I recall reading that in the days prior to the fall of Communism there were many Polish residents who had lived their working lives in Chicago, where there is a very large Polish expatriate community, returned to Poland for their retirement where, with their social security payment checks they lived like kings. Their US dollar ritirement income allowed them to purchase luxuries not affordable to the average Pole.
I suspect that any Congressional effort to shut of Social Security payments to foreign citizens who had relocated outside of the US would not be constitutional. There are large communities of US citizen retirees in Panama, Costa Rica and Mexico as well. Medicare benefits are not available outside of the US, but some return to the US for medical treatment when required. One US citizen retiree I know who lives in Manaus, Brazil, has come to Miami on 3 ocassions for cancer surgery and facial restoration, and I expect to see him back here within the next few months. He has a sister who lives here and he participates in our Senior Men’s Sunday School class at our church whenever he is here.
@Roger, with your comment I realized that I probably misunderstood the Totalization Agreements, so I removed that from the text.
@ swisspinoy
Okay that was pretty complicated but very cleverly written. So what you are saying is we were right to not count on much in the way of Social Security for my husband when he “comes of age”. Those numbers SS provides us each year mean pretty much nothing. Well we ask for little and receive less, I guess.
*@swisspenoy, I am not an expert in totalization agreements by any means, so my comments related to specific situations with which I happen to be familiar. I do know that is is much more difficult for a US expat who is self-employed to survive in a foreign country where there is not agreement, or where the agreement does not exonerate the US citizen from being burdened with double social security taxation. MarkPineTree, one of our bloggers with US citizenship who lives in Brazil has written about what a burden this is to him. As I recall his cumulative social security tax payments to the country where he lives and to the US are about 33% of his net income. This certainly places the self-employed US citizen abroad at a significant competitive disadvantage.
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Thanks ExpatAmi — On a related subject, will a renunciant who is entitled to a US military pension suffer any consequences as a result of relinquishment? In other words, does a retired military pensioner still receive his/her full pension? Logically they should, but you never can apply much logic to this. A friend of mine asked the question, and I didn’t know.
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