Other than concerning 401(k)s, one of the most common questions I receive from clients moving away from the US is, “What do I do with Social Security when I move overseas?”
The short answer is, nothing.
Social Security is technically a government benefit program. Even though you qualify by paying taxes on your earnings, your contribution does not amount to an account balance you can control. Instead, how much you contribute to the system, whether you are entitled to benefits, and how much you are entitled to receive in retirement are determined by law.
It means that you either are compelled to pay in by the US government based on your employment situation, or not. There is no choice involved.
The only decision you are able to make is whether you will change how you live and maintain an international career just so you can increase your overall retirement benefits, combining Social Security in the US and public pensions from other countries. Given most governments in the world are leaning toward cutting social benefits, it may not be a worthwhile goal in the long run.
Nevertheless, I think it is still helpful to learn how working in multiple countries impacts your contribution into the system and eventually your benefits. I hope that it will help you determine what your options are likely to be when it’s time to apply for benefits.
Do I pay into US Social Security when I move overseas?
If your work falls under the following groups, it’s likely you will be forced to pay into the US system, even if you conduct your work overseas and in some instances are able to exclude income from current year taxation.
- Work for US government agencies
- Work for US-based companies remotely and on US payroll
- Self-employed through pass through entity (such as sole proprietorship, general partnerships, and LLC.)
In the first two categories, payroll tax will be automatically deducted from your paycheck as if you live in the US. Those under the third category will pay self-employment tax (double the payroll tax) on the annual income tax return.
In all other cases, whether or not you continue to contribute to US Social Security is governed by Totalization Agreements.
Totalization Agreements are intergovernmental agreements that determine which social pension system the worker should pay into. They were mainly created so that you do not get taxed twice on the same earnings.
Again, there is no gray area here. You do not determine which system you pay into. The agreement spells it out.
In countries where there is no agreement with the US, it is possible you may need to pay into both the US and foreign system if you are self-employed as a US citizen or green card holder. However, if you are an employee of a foreign employer, you likely will not pay into the US system and will have a gap in the US earning records.
This is the second area Totalization Agreements govern. If you have fewer than enough credits to qualify in the US system, Social Security may reach out directly to its counter-party system in the other country to qualify you. However, it does not use your actual payments into the foreign system to calculate your final US benefits. (You can read more about how the credit system works here.)
In addition, if you already have the minimum 40 credits to qualify for benefits, Social Security Administration will calculate your benefits based on your US earning history alone. You do not get to increase your US benefits by taking into account foreign earnings.
Therefore, if you already have 40 credits, or roughly 10 years of earning history where you pay into US social security, you will qualify for retirement benefits in the US. If you also have extensive work history in other countries, then it’s likely you will qualify for more than one public retirement income scheme.
(How you will actually claim it while you live overseas is a separate discussion. I will not go into it here. SSA has issued guidance on how US expats or even non-US persons with past Social Security contributions may claim benefits while residing overseas.)
What do I do with Social Security when I move overseas
To summarize before we move on, you might fall into one of the following four types of situations after you move overseas before retirement. I will go into more detailed examples for the last three.
- Continue to pay into US system while working in a foreign country.
- Stop paying into US system, and you have fewer than 40 credits for social security retirement benefits.
- You already have at least 40 credits in the US system, but do not go on to qualify for a pension in another country.
- You already have at least 40 credits in the US system, and also qualify for a pension in another country.
Not enough credits to qualify in the US
Many work visa or green card holders who eventually leave the US fall under this category. You may have come to US for study and worked briefly, but moved to another country before you accumulated 40 credits. Or you may be an expat spouse that has worked intermittently around the world.
If you are simply returning to your home country for good, it might be less complicated. You will likely become eligible for your home country’s system. You may wish to investigate the totalization agreement between the US and your home country, and see if there is a need to include your US work history to increase your benefits in your home country.
Not so easy for the globetrotting kind. If you are moving from country to country without committing to a single employer, it’s likely that you will accumulate work histories in multiple countries, but not long enough in any one to qualify for public retirement benefits.
If this is the case for you, at some point you may want to investigate the best place for you to “retire” to cobble together all the earning records to qualify for pension. For example, you may be from the Netherlands, having worked all over the EU and the US, but never stayed in one country for longer than five years. Since within the EU there may be a reciprocal agreement among countries, you may want to retire in a EU country where you will likely qualify for the highest benefits taking into account all the work history, and one that has totalization agreement with the US.
The same applies to those returning to the US to retire. You may want to investigate the totalization agreements with countries you’ve worked in to qualify you in the US.
Qualify for US Social Security only
On the other hand, you might have worked in the US for more than 10 years, but continued your career in other countries. It’s likely that you are a US citizen or a green card holder to fall under this category.
As mentioned earlier, once you qualify in the US, your earning records overseas will not change your US benefit. So if you don’t qualify for a pension in any other country, your benefits will be calculated based on your US earning records alone.
The Social Security retirement benefit is calculated based on the highest 35 years of earnings subject to social security taxes. If you only have 12 years of earning in the US, you are presumed to have earned zero income in the rest of 23 years. Therefore, your social security payment will be much lower than if you have worked the whole time in the US and paid into social security.
To set the stage to compare this group with the next, let’s insert a simple example here.
Let’s say you were born in 1983, and worked in the US between 2007 and 2016. Your earning record gave you exactly 40 credits, as shown below.
Assume after 2016 you never accumulated enough work history in any country to qualify for another pension. In this case, you will begin to receive USD 1,108 per month at full retirement age. (The results are from the detailed social security benefits calculator published by SSA here.)
Qualify for US Social Security and Foreign Pension
You may think that this sounds like the best of both worlds. Usually people who fall under this situation are those who immigrated to the US mid-career, or left the US mid-career to build a career in another country. In order to qualify for more than one pension, it’s likely you have worked in each country extensively.
Here comes the bad news. If you also qualify for a foreign pension, your US social security benefit will be reduced. This is called Windfall Elimination.
How does it work? Let’s continue with the previous example.
Assuming now instead of only Social Security, you also qualify for a pension in Japan at USD 1,000 / month. All else being equal, your Social Security benefit will now be reduced by 40%!
So instead of getting 1,108 + 1,000 = 2,108, you will only receive 661 + 1,000 = 1,661.
As you can see, Windfall Elimination applies a smaller replacement rate for the first USD 895 of earnings. This is the US government saying, if you have another pension coming from earnings on which you did not pay US payroll taxes, we will reduce your benefits.
Many people find this unfair. Why does a second pension, which is based on a completely separate set of earning years, reduce your benefit in the US?
There is no good reason for it, other than that since Social Security is a government benefit, the government has the right to impose any rule to take it away.
When you apply for social security, you will be asked to declare whether you will receive “uncovered pension” in the same year. The benefit will automatically be reduced before you receive it.
Some foreign public pension, however, does not reduce your social security benefits. If the pension is funded by general revenue and not calculated based on earnings, then it is not the type of pension that will trigger windfall elimination. (Think New Zealand!)
Also, if you have more than 20 years of substantial earnings in the US, the reduction percentage will become less severe. Once you have over 30 years of substantial earnings, your Social Security will not be reduced, even if you have a foreign pension.
(There are several different provisions on whether Windfall Elimination applies to your foreign pension. Read the full list here.)
So I hope this gives you a good summary of what you may encounter when it’s time to claim some kind of public benefit at old age. Most people my age do not count on Social Security as a potential retirement income source. Trying to qualify for some type of minimum public assistance in a country that still guarantees it may not be a bad idea!
This is the fourth installment of the series “What to do when I move overseas”. You may be interested in the first three about investment accounts, real estate, and insurance.
For the scenario “Qualify for US Social Security only”, I have a question. I read about foreign worker test:
I am little bit confused about how this works. I work in US for 23 years and pay some social security taxes. Lets say now I go to foreign country now (at age 46) and earn about $33,000/month from now through age of 61. Lets say I want to retire at age of 61 when I relocate to USA but I don’t plan to work then. Am I eligible to receive benefits from age of 61 or I won’t be eligible at all since I worked in foreign country for almost 16 years and I didn’t pay social security taxes on my foreign income?
Hi, if you paid in to SS for 23 years then you are already eligible for SS retirement benefits. The minimum is 40 credits, or 10 years. How much you get is calculated based on 35 years of earnings. So the benefit is calculated using 23 years of none zero earnings + $0 earning for 12 years.