ACA Position on Social Security issues and the Overseas American
Currently there are eight imperfections in US Social Security laws and regulations. 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 (WEP) is a statutory provision in United States law which affects benefits paid by the Social Security Administration under Title II of the Social Security Act It reduces the Primary Insurance Amount (PIA) of a person's Retirement Insurance Benefit (RIB) of Disability Insurance Benefit (DIB) when that person is eligible or entitled to a pension based on a job which did not contribute to the Social Security Trust Fund which includes most foreign source pensions.
Benefits from Social Security under the WEP can, in some cases, be reduced by 50% which can cause material financial hardship for overseas Americans who earn only modest foreign source pensions. To calculate how the WEP will affect your retirement benefits see: https://www.socialsecurity.gov/planners/retire/anyPiaWepjs04.html
When Congress introduced the windfall elimination, it was done "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." Most 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 believes that all citizens affected by the WEP should benefit from the relief as proposed through various bills introduced in Congress, the most recent being the Social Security Fairness Act which has been introduced in the US House of REpresentatives: https://www.congress.gov/bill/116th-congress/house-bill/141/text?r=1 and in the US Senate: https://www.congress.gov/bill/116th-congress/senate-bill/521/text
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 has no such however, in Social Security reform, voluntary personal retirement accounts have been proposed.
Historically, the US Government has opposed the concept of voluntary participation. 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.".
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, some Americans living overseas who are required to participate in US Social Security, and who are in a disadvantageous situation because of this. Since 1984, self-employed Americans working abroad have to pay Social Security Self-Employment Tax on 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 these individual to credit foreign social security taxes paid against those levied by the US Social security system on self-employment income. These foreign Social security taxes are also 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. More information can be found from the IRS on this at: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employment-Tax-Social-Security-and-Medicare-Taxes
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 (add link here) .
While Americans state-side have a dollar amount earnings limit beyond which they start to lose some social security pension benefits, systems used abroad limit 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.
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). 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.
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.