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U.S. Expats Social Security Income vs. the Windfall Elimination Provision (WEP)
Author: Joel Baretto, CFP®
October 18, 2023
U.S. expats who possess foreign pensions should be aware of the potential impact of the Windfall Elimination Provision (WEP) on their Social Security benefits during retirement.
The WEP, established in 1985, forms part of the U.S. Social Security law and is designed to reduce the Social Security benefits received by individuals who receive pensions from jobs that were not subject to Social Security taxes, such as non-U.S. pensions. The Social Security benefit formulas aim to provide income replacement for individuals with lower earnings. However, as these formulas do not account for pension benefits, individuals with non-U.S. pensions may appear to have lower income and could receive a higher percentage of Social Security benefits. The purpose of the WEP is to eliminate the perceived advantage of receiving full benefits from both a pension and Social Security.
To determine the extent to which your benefits may be reduced as an American taxpayer with a non-U.S. pension, it is essential to assess whether the WEP applies to your specific situation.
Do I qualify to receive Social Security benefits?
To qualify for Social Security retirement benefits, an individual typically needs to have accumulated a minimum of 40 credits, with a maximum of four credits earned per year. As of 2023, each credit is earned for every $1,640 in earnings. The determination of the actual amount of Social Security retirement benefits a person is eligible to receive involves a formula utilized by the Social Security Administration. This formula takes into consideration the 35 years in which the individual earned the highest income throughout their career. Nevertheless, the specific benefit amount will be influenced by several factors, including the individual’s chosen commencement date for receiving benefits, their age at the commencement of benefits, and their work history detailing earnings.
The primary insurance amount (PIA) is a pivotal factor in the determination of Social Security benefits for eligible individuals. This calculation incorporates various variables, such as the individual’s average indexed monthly earnings, the year of their first eligibility, and the cost-of-living adjustment (COLA). The Windfall Elimination Provision (WEP) plays a role in reducing the PIA by a predetermined percentage, which can vary depending on the number of years the individual worked without being covered by Social Security and their earnings history. However, if an individual has amassed 30 or more years of substantial earnings, the WEP does not result in any reduction in benefits.
Is the WEP applicable to my pension?
The original intent behind the implementation of the Windfall Elimination Provision (WEP) in 1983 was to counterbalance the advantage enjoyed by government employees who received earnings from pensions not covered by Social Security, while simultaneously receiving their full Social Security retirement benefits.
However, unintended consequences arose, affecting other types of pensions, including foreign pensions provided by non-U.S. employers or state benefits from other countries, which also fall into the category of non-covered pensions. Consequently, individuals who receive such non-covered pensions may experience a reduction in their Social Security benefits due to the application of the WEP.
It is important to emphasize that the WEP exclusively pertains to retirement benefits received by the primary beneficiary and does not extend to survivor benefits issued by the U.S. Social Security Administration.
Is there a bilateral social security agreement?
Despite the predominant impact of the Windfall Elimination Provision (WEP) in reducing benefits from U.S. sources, bilateral social security agreements have been established over the past four decades to establish a cooperative framework between nations.
Bilateral social security agreements serve two main objectives. Firstly, they aim to prevent the issue of dual taxation on Social Security. This occurs when an individual from one country works in another country and is obligated to pay Social Security taxes to both countries on the same income. Secondly, these agreements aim to safeguard workers who have divided their careers between the United States and another country, ensuring that any gaps in benefit coverage are bridged. As a result, these agreements contribute to maximizing Social Security benefits.
Under these agreements, the credits earned in one country can be combined with the credits earned in the other country, facilitating individuals in meeting the eligibility requirements for benefits in both countries. Moreover, these agreements ensure that benefits provided by one country are not reduced or eliminated by the other country, providing enhanced financial security.
Countries with Social Security Agreement | ||
Australia | Germany | Poland |
Austria | Greece | Portugal |
Belgium | Hungary | Slovak Republic |
Brazil | Iceland | Slovenia |
Canada | Ireland | South Korea |
Chile | Italy | Spain |
Czech Republic | Japan | Sweden |
Denmark | Luxembourg | Switzerland |
Finland | Netherlands | United Kingdom |
France | Norway | Uruguay |
Do I qualify for a WEP reduction?
Individuals can utilize the WEP online calculator to assess the potential influence of the provision. It is important to acknowledge that the reduction in Social Security benefits is capped at 50% of the pension amount derived from earnings not covered by Social Security. However, in most cases, the reduction does not reach the aforementioned threshold.
Hence, for a comprehensive approach to financial planning, it is crucial for individuals receiving non-U.S. pensions to evaluate the potential impact of the WEP on their retirement plans and make appropriate adjustments as needed.
At Abacus Wealth International (AWI), we recognize the distinct financial planning challenges encountered by U.S. expatriates and cross-border families living abroad. Our expertise lies in helping you optimize your wealth and avoid costly mistakes. To learn more about our services tailored for U.S. expats, we invite you to schedule a free 15-minute consultation below.
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