Social Security and the Overseas American
Recommended Changes to US Social Security Laws and Regulations as They Apply to Overseas Americans
This paper discusses some current Social Security laws of the United States, their potential negative or unfair impact on the lives of US citizens living and working abroad and suggested improvements to existing legislation.
As seen by the overseas American community, the eight imperfections in current US Social Security laws and regulations which are discussed below cause hardships and/or treat overseas Americans, their foreign spouses and children, in a discriminatory manner compared to citizens living in the United States. These imperfections are addressed below together with suggested forms of appropriate redress.
1. Windfall Elimination Provision (WEP): Unfair Denial of Social Security Benefits to U.S. Citizens
The "Windfall Elimination Provision " of the Social Security Act (www.ssa.gov/pubs/10045.pdf ) stipulates that almost everyone (there are a few exceptions) who has a pension derived from employment not covered by Social Security, including foreign source pensions to which contributions have been made, will have their Social Security benefits computed in such a way that for every $ 100 of such a pension, the Social Security benefits will be lowered by approximately $ 50. While the Social Security Administration (SSA) guarantees that they will not reduce a beneficiary's benefit by more than 50%, this still causes material financial hardship for overseas Americans who earn only modest foreign source pensions.
As explained by the Congress when windfall elimination was introduced, it was supposed "to remove an unintended advantage that the heavy weighting in the Social Security benefit formula now provides for persons who have substantial pensions from non-covered employment." Small foreign pensions are obviously not substantial in any respect. ACA does not believe that the Congress really intended to penalize overseas Americans with small foreign source pensions in this way. ACA is not looking for a WEP advantage for overseas Americans, but believes that all citizens affected by the WEP should benefit from the relief as proposed below.
Although bills to eliminate WEP are introduced in every Congress; they typically die in committee. In the 112th Congress, they are: Social Security Fairness Act of 2011 – H.R.1332 and S.2010 were introduced by Congressman Howard P. "Buck" McKeon (R-CA) and Senator John F. Kerry (D-MA), respectively. ACA strongly supports these measures and urges the Congress to enact such legislation.
2. No Program for Voluntary Participation in Social Security
A number of the major trading nations of the world have provisions in their national social security programs for voluntary participation by their citizens living abroad. To encourage their citizens to live and work abroad, and build overseas markets for their exports, these countries want to ensure that their overseas citizens, when they retire and come home, will have some guaranteed minimum basic pension.
The Social Security Administration is aware of other countries' efforts in the arena and the idea of additional voluntary contributions (for all persons covered by the SSA), is not new.
In considering Social Security reform, voluntary personal retirement accounts have been proposed. Research and debate have focused on several aspects of these accounts, including how such accounts would affect aggregate saving, system finances, and benefit levels. Little attention, however, has been paid to policies that would govern the distribution of account balances. This analysis considers such policies with respect to the annuitization of account balances at retirement using the Social Security Administration's Modeling Income in the New Term (MINT) model and a modified version of a recent legislative proposal to evaluate the effects of partial annuitization requirements.
Poverty-level Annuitization Requirements in Social Security Proposals Incorporating Personal Retirement Accounts, Issue Paper No. 2005-01 (released April 2005).
Note: Chile was the first country to replace its public pay-as you-go system with individual accounts. Since its inception in 1981, the new program has undergone a number of changes that offer workers more choices than they had before. This note describes those changes, which include an increase in the type and number of funds from which a worker may choose for an individual account, more incentives for making additional voluntary contributions, and the introduction of a separate mandatory individual account for unemployment benefits.
See: Barbara E. Kritzer, "Recent Changes to the Chilean System of Individual Accounts" from Social Security Bulletin, Vol. 64 No. 4 (released June 2003); and Barbara E. Kritzer, Stephen J. Kay and Tapen Sinha, "Next Generation of Individual Account Pension Reforms in Latin America" from Social Security Bulletin, Vol. 71, No. 1 (2011).
Historically, the US Government has opposed the concept of voluntary participation and especially by overseas Americans. President Carter explained the US Government's position in his "Report on Equitable Treatment of United States Citizens Living Abroad", which he sent to the Congress on August 27, 1979. According to this report, "A basic problem with any voluntary participation scheme is adverse selection. Those persons who would volunteer to participate in social security would tend to be those who would receive the largest returns on their contributions, thereby unduly increasing the cost of the program." Subsequent administrations have maintained this opposition because only those Americans abroad who would get something back would contribute. This is a curious objection to a program whose very purpose is to provide benefits in return for contributions.
ACA believes that the US Government should welcome the voluntary participation of overseas Americans in the American social security system as a measure of solidarity with those who one day plan to return to the US and want to make prudent provision for this return. ACA believes that it would be in the interest of all Americans if legislation would be amended to enable voluntary participation in US Social Security programs for all Americans both in the United States and living abroad.
3. Double Jeopardy for Some Self-Employed Americans Abroad
Paradoxically, there are some Americans living overseas who are being forced to participate in US Social Security, and who are in a disadvantageous situation because of this. Since 1984, Americans working abroad have to pay Social Security Self-Employment Tax on self-employment income earned abroad, even though all of the same earned income can be excluded from US income tax. The US Tax Code does not allow any credit against the self-employment tax for a similar tax paid to a foreign social security system, and such foreign tax is not deductible for purposes of computing net earnings from self-employment. This obviously imposes a heavy additional burden on self-employed Americans residing abroad in those countries that do not have bilateral social security totalization agreements with the United States. These individuals are thus subject to double taxation by two social security systems and the second contribution is itself taxed by the United States.
Self-employed US taxpayers must continue to pay US self-employment (social security) taxes while living abroad, even though they may also be subject to similar taxes in the country of residence. Such taxes are imposed at a rate of 15.3 percent (12.4% for Social Security and 2.9% for Medicare) on net earnings of up to the base amount $ 110,000 (2012). An additional 2.9 percent is taxed on earnings which are more than the base. Thus, self-employed individuals will be subject to the 2.9-percent tax on all self-employment income. A deduction is allowed, for purposes of determining the amount of earnings subject to self-employment tax, in the amount of 50 percent of the self-employment tax (prior to considering the deduction). In addition, an income tax deduction may be claimed for 50 percent of the actual self-employment tax incurred. It should be noted that Social Security Totalization Agreements have been concluded with some foreign countries which may reduce or eliminate the US self-employment tax. More information can be found from the IRS.
ACA believes that the pre-1984 practice should be reinstated and that the mandatory Social Security Self-Employment Tax should be excluded for Americans who are bona fide residents of a foreign country. Alternatively, American bona fide residents abroad should be entitled to a credit against the US Social Security Self-Employment Tax for taxes paid to a foreign obligatory social insurance system.
4. Different Earnings Limits Tests Hurt Some Overseas Americans
The earnings limits on outside income for those who are claiming social security benefits and have not yet reached full retirement age under the current social security pension system do not operate the same way abroad as they do in the United States. This is documented on the SSA web site under the section entitled foreign work test. While Americans at home have a dollar amount earnings limit beyond which they start to lose some social security pension benefits, the system used abroad limits the amount of time per month that an individual can work in employment or self-employment which is not subject to US Social Security taxes to no more than 45 hours per month or else all of the benefits for that month will be lost. This loss of benefits applies to many US citizens who are owners or part owners of a trade or business even if the US citizen does not actually work in the trade or business or even receive any income from it! The exact wording from the Social Security Administration is:
A beneficiary who is the owner or part-owner of a trade or business outside the US is subject to foreign work deductions if he or she works or holds himself or herself out to the public as available to work in excess of 45 hours a month. Mere ownership of the business is not sufficient to cause foreign work deductions; the individual must either work or be available to work in a functioning business for more than 45 hours a month. Benefits are withheld for each month a beneficiary younger than full retirement age works more than 45 hours outside the US in employment or self-employment not subject to US Social Security taxes. It does not matter how much was earned or how many hours were worked each day. A person is considered to be working on any day he or she:
• Works as an employee or self-employed person;
• Has an agreement to work even if he or she does not actually work because of sickness, vacation, etc.; or
• Is the owner or part owner of a trade or business even if he or she does not actually work in the trade or business or receive any income from it.
This causes a real hardship for both overseas American entrepreneurs, as well as those on very small pensions who take low salary jobs which require working more than one week per month. If the overseas US citizen's benefits are withheld because of the conditions set out above, “no benefits can be paid to anyone else receiving benefits on his or her record for those months.” The beneficiaries of this special provision are those in usually well paid liberal professions who can adjust their outside work schedules to fall within the time limits.
ACA believes that the United States should not favor some Americans over others living and working abroad. The fact that there is an earnings based test in the United States and an hourly test and business ownership test overseas does not appear to make any sense. The law should apply a consistent earnings limit test for all Americans at home and abroad, and should be so amended.
5. Unfair Denial of Social Security Benefits to Certain Foreign Spouses and Adopted Children of U.S. Citizens
Foreign spouses of US citizens must have been married to the US citizen spouse and lived with the US citizen spouse in the United States for five years to be eligible to receive dependency and survivor benefits.
Children who cannot meet the residency requirement on their own may be considered to meet it if the requirement is met by the worker and the other parent. Children who are adopted outside the United States will not be paid any dependency or survivor benefits even if the prior US residency requirement is met.
Curiously, this loss of benefits does not apply to citizens of certain specified countries, or citizens or residents of countries with which the US has a Social Security Agreement.
ACA opposes selective discrimination against foreign spouses on the basis of their country of origin or residence. Once again this does violence to equal treatment for all US citizens. This discrimination should be amended out of the Social Security laws.
6. Loss of Supplemental Social Security Benefits Abroad
Current US Social Security laws and regulations call for Supplemental Social Security Income (SSI) benefits to be cut off for persons who are outside the United States for more than 30 consecutive days, except for children of military stationed outside the United States, or students temporarily abroad as part of an educational program.
This not only imposes a hardship on disabled citizens abroad. Disabled children who need special care and who have received benefits under SSI provisions at home, lose these benefits once their parents move abroad.
The SSA website states the following:
"When we say you are outside the U.S., we mean that you are not in one of the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, the Northern Mariana Islands or American Samoa. Once you have been out of the U.S. for at least 30 days in a row, you are considered to be outside the country until you return and stay in the U.S. for at least 30 days in a row. If you are not a U.S. citizen, you also may have to prove that you were lawfully present in the U.S. for that 30-day period. For more information, contact the nearest U.S. Embassy or consulate or Social Security office."
Once you are outside for 30 days, a whole new set of rules could apply to you, even if you still have your legal residency in the United States.
ACA believes that this provision is unfair and the loss of these benefits brings no significant material benefit to the United States. These benefits should be made available to all eligible individuals no matter where they live or travel.
7. Withholding Tax on Social Security and Survivors Benefits of Non-Resident Alien Spouses of American Citizens
Social Security benefits received by non-resident alien spouses of US citizens are subject to US income tax withholding of 30% on 85% the benefit amount, which is the equivalent to a 25.5% tax on the full benefit.
This withholding tax does not apply to residents of Canada, Egypt, Germany, Ireland, Israel, Italy, Japan, Romania, the UK (Great Britain), or of India (for individuals who are Indian nationals and residents of India). For Switzerland, the withholding is reduced to 15%.
Similarly, a 30% withholding tax is applied to survivors' benefits payable to non-resident aliens under the Civil Service Retirement Plan, the Retired Serviceman's Family Protection Plan, and the Survivor Benefit Plan.
While the general principle of withholding taxes on payments from United States sources to non-resident aliens is not at issue, ACA recommends that an exception be made for Social Security and other survivor and social insurance benefits payable to the surviving non-resident alien spouses of deceased Americans by eliminating or reducing the withholding tax, at least for nationals of countries with which the United States has concluded Totalization Agreements.
8. Penalizing exception to Taxation of Social Security Benefits when Filing as "Married Filing Separately"
Since 1984, up to half of a person's Social Security benefits can be taxable income if the adjusted gross income plus non-taxable interest and half of the Social Security benefits exceeds a base amount. The base amount is $ 25,000 for an individual, $ 32,000 for a couple filing jointly, but zero for a couple filing separately if they lived together any time during the year.
"Married Filing Separately" status is quite often used by Americans abroad who are married to non-resident aliens because the non-resident alien spouse does not normally have US tax obligations.
ACA believes that current treatment of US citizens who use the "Married Filing Separately" status abroad is discriminatory and should be remedied.
ACA proposes that as in the case of "Unmarried" and "Married Filing Jointly", a base amount deduction should also be allowed for other income before the Social Security benefit becomes taxable when overseas Americans file tax returns as "Married Filing Separately". Alternatively, allowing US citizens abroad to use the Head of Household filing status when they are living overseas, married to a non-resident alien and receiving Social Security benefits may alleviate this issue.
What Can and Should be Done?
ACA urges the Administration and the Congress to rethink the overall strategy and tactics of the Social Security programs of the United States as they apply to US citizens living and working abroad. Were the United States to make such changes it would not be innovating on the world stage, but catching up with other countries who believe that helping their overseas citizens helps their national economy back home. American programs should also be designed to encourage US citizens to help build a stronger market for US products and services in the rapidly globalizing world economy. Current laws act as disincentives to Americans to live and work abroad and should be amended.
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Updated 21 June 2012
Last Updated October 19, 2012