Enticed by new environments, low costs of living and senior-friendly health care systems, boomer retirees are heading overseas in droves. Roughly 400,000 American retirees now live abroad, according to the Social Security Administration, a figure that’s increased by nearly 20 percent since 2010.
American workers are also spending more career years overseas, and more retirees than ever have significant earnings histories outside the United States.
Whether they’ve worked abroad, intend to move or immigrated during their careers, these retirees all want to know how can they collect their Social Security benefits? Are they entitled to benefits from the U.S. government, foreign governments, both – or neither? And, of course, what taxes will they have to pay? In our increasingly global economy, any retirement advisor should be able to help clients answer these questions.
Can expats collect Social Security?
“Yes, you can receive payments if you’re residing abroad, unless you live in one of a few countries,” says Ines Zemelman, founder and president of Taxes for Expats. Those exceptions include Ukraine, Belarus, Georgia and other former Soviet states – none of which are top destinations for U.S. retirees. Embassies located in U.S. retirement hotspots, on the other hand, may actually provide Social Security services – and even take applications. For travel-minded retirees who want to make sure they’ll be able to collect, the SSA provides the simple Payments Abroad Screening Tool.
For the most part, citizenship doesn’t affect eligibility, either. U.S. citizens living abroad – as well as dual citizens and non-citizens with U.S. earnings histories – can collect under most circumstances. The SSA provides a complete list of conditions and requirements in its publication “Your Payments While You are Outside the United States.”
Even residents of restricted countries may be able to receive benefits, though it can be tricky. The SSA lists a variety of restricted payment conditions, which include a tri-monthly appearance at a U.S. embassy or consulate.
“These exceptions are hard to come by,” says Zemelman. A more realistic option may be to head to a non-restricted country to pick up withheld payments.
Whether they live stateside or abroad, retirees with foreign work histories can usually still collect.
“If you worked in a country that has a Social Security Totalization Agreement with the U.S., credits you earned in that country can be combined with your US credits to meet the Social Security requirements – either in the U.S., in your resident country or both countries,” says Zemelman.
The U.S. has established these bilateral agreements with 26 countries, including Italy, Germany, Canada and the U.K. Designed to protect benefits for workers with international careers, they ensure similar legal structures and requirements among their member nations’ retirement programs.
It’s important to note, however, the difference between credits and earnings histories.
“The amount of income earned abroad does not count towards your U.S. earnings history and does not increase the amount of future benefits,” says Zemelman. “It is only helpful to meet the minimum required threshold of 10 years or 40 quarter credits.”
To be eligible for foreign credits, a retiree must also have earned at least six credits in the U.S.
As long as those minimums are met, however – and as long as a retiree worked only in countries with totalization agreements – total benefits are somewhat of a wash. Consider a retiree who worked 25 of their highest earning years in the U.S. and the other 10 in the U.K., for example. He or she will only have earned 25 of the 35 years in the U.S. equation, but they’ll also qualify for benefits from the U.K. Different programs and tax rates may muddy the waters, but the sum of the parts is usually close to the whole that the employee would have been gotten from working in the U.S.
The same considerations apply to immigrants, as well, as long as they emigrate from countries with totalization agreements. Using a similar example, consider a retiree who was born in the U.K., worked there for 25 years, immigrated to the U.S. and worked another 10 here. Having accumulated 140 total credits – far more than the minimum – they will be eligible for benefits from both countries.
Finally, for expats who still file U.S. returns, Social Security taxes are relatively straightforward. Like stateside retirees, couples earning between $32,000 and $44,000 will pay federal income tax on 50 percent of their benefits, while those earning more than $44,000 will pay tax on 85 percent.
Fortunately, totalization agreements also prevent dual taxation.
“Tax paid in the foreign country on U.S. Social Security benefits will be applied as a foreign tax credit against tax paid or withheld in the U.S.,” says Zemelman.
Non-citizens may have to pay more, however.
“If you’re a non-resident alien receiving U.S. Social Security benefits for work previously performed in the US, 85 percent of your benefits will be subject to a 30 percent tax,” says Zemelman.
Still, that rate is reduced or eliminated in countries that have a tax treaty with the U.S., which include Canada, Germany, Israel and the U.K. Depending on a resident country’s tax laws, there may also be provisions similar to the U.S.’s tax credit for foreign tax on U.S. benefits.