Americans Helping Americans Abroad

Position Papers - 2014

Social Security Aspects of Working Abroad

Americans who take jobs outside the USA do not always understand the effect this can have on their American Social Security pension when the time comes for it to be calculated and paid. If they have earned pension credits under a foreign country's system (so-called "non-covered work"), their American pension will be reduced by an amount (up to $408 monthly in 2014 but not more than one-half the non-covered pension).

This reduction is mandated by a provision of the Social Security Law which is known as the "Windfall Elimination Provision" (hereafter the 'WEP') and which is intended to prevent the retiree from benefitting from the favorable bias of the U.S. system for low-earners while pocketing a foreign pension. Although the WEP was adopted in 1983 to adjust for forced enrollment of US civil servants in the Social Security system (previous to 1983 they had their own retirement program), the principle was extended to pensions of Americans who earned a US Social Security pension and a pension for 'non-covered work' during their careers. Americans who have worked abroad are almost invariably surprised to learn their pensions are subject to the WEP offset and the more so as this legislation didn't target them or allow them to raise objections pursuant to rules of administrative procedure.

Legislative proposals to limit or abolish WEP, based on such considerations, have been regularly made since 2000, whether by having it apply only partially to modest pensions or by full repeal, but none of these bills have become law. AARO would prefer reform of the WEP, exempting pensions below a certain monthly amount from WEP and allowing for a graduated imposition thereof to more substantial pensions. The Bills currently pending in the House and Senate (H.R.1795 and S. 896) would repeal WEP, if passed. AARO and the Overseas Coalition support these proposals and urge their members to contact their Representatives and Senators to cosponsor these bills and take whatever action is necessary to pass them into law.

That Congress and the Social Security Administration recognized that the WEP was a blunt instrument requiring curtailment in certain circumstances is evident in the rules which restrict or soften its effect: the thirty-year substantial earnings exception, the "totalization exception", the limitation of WEP reduction to one-half the foreign pension. Moreover, it is U.S. Totalization Agreements that forbid a US citizen working abroad from enrolling in U.S. Social Security after five years abroad. These qualifications and the barrier raised by Totalization Agreements bolster our view that the treatment of U.S. citizens working abroad can be harsh and unjustified. The appropriate remedy for this discrimination is the reform or repeal of the WEP, as proposed above.

On the other hand, an issue capable of rallying the support of both political parties is the thresholds for income taxation of U.S. old-age and disability pensions. In 1983 and 1993, 50% or 85% of these pensions were made taxable if the pensioner's income reached a certain amount, but no provision was made to index the income thresholds, which are now more than 30 and 20 years old. Given the CPI change since 1983, the thresholds that trigger income tax at 50% of benefits should be about $58,000 for individuals and $74,850 for couples instead of the $25,000 and $32,000 that have remained unchanged. The result is that every year more and more elderly and disabled Americans have to pay income tax on their pensions and have their purchasing power eroded. Revising the thresholds to a realistic amount and indexing them for inflation will thus benefit all Americans and should prove attractive to both political parties, to our Overseas coalition and to taxpayer associations in the United States like AARP.


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