Social Security for US Taxpayers Abroad
For US persons living abroad, one often overlooked financial planning area is Social Security. I’d contend that most people don’t think about Social Security until retirement looms and the question of how much Social Security income you will receive becomes relevant.
For those living in the US, each pay-period, an amount is withheld for federal, state, local, and FICA (Social Security & Medicare) tax. Throughout their working years, Americans pay into Social Security and accrue a retirement income stream and healthcare without even thinking about it. This might not be the case for US persons abroad.
A Totalization Agreement enables US taxpayers working abroad and paying foreign tax to accrue Social Security credits. However, many countries, including Singapore, do not have a US Totalization Agreement, so time spent working abroad and paying foreign tax does not necessarily lead to Social Security eligibility nor its associated retirement income and Medicare eligibility.
What is Social Security?
Social Security is an inflation-adjusted annuity income stream during retirement. The income amount is based on how much you paid into the system during working years. For those with high income, generally, more is paid into Social Security causing future benefits to be higher. Each year, the income stream increases by a Cost-of-Living Adjustment (COLA) enabling spending to keep up with inflation.
This income can be combined with Traditional and Roth IRAs and taxable investments to help fund retirement goals. Social Security is among the most generous government pensions in the world that isn’t tied to having worked for the government.
Are You Eligible for Social Security?
In order to achieve Social Security eligibility, you must pay into the system for 40 quarters (10-years). For those living in the US, this is typically not an issue as each pay-period money is withheld for this purpose. In 2024, the tax is 6.2% on the first $168,600 of income, 1.45% on all income, and 0.9% on income above a threshold. For example, Jenny lives in Connecticut, is married, and earns USD$300k/yr—she would pay ~$15,250 in FICA tax.
For married couples, it is possible to receive Social Security benefits based on your spouse’s earnings record even if you have not met the 40-quarter requirement. For example, if Jenny meets the 40-quarter requirement but her husband, Bob, does not, he can still receive benefits based on Jenny’s earnings.
For US persons abroad, this depends on the spouse’s US status. For those with a non-US spouse, they might not receive benefits depending on citizenship or country of residence. This goes back to US Totalization Agreements. For example, if Bob is Japanese, the US-Japan Totalization Agreement enables him to receive benefits. However, if Bob is Singaporean, he would not receive benefits because there is no US-Singapore Totalization Agreement (assumes no green-card).
We often speak with clients who have worked in countries such as the UK, Germany, and Australia, amongst others, all of which have US Totalization Agreements. A Social Security statement, which can be obtained on the Social Security Administration’s website, lists previous earnings, credits earned, and expected future benefit. However, the statement does not list credits accrued while living in foreign countries. Meaning, even if the statement says you are ineligible for Social Security and Medicare benefits, you might be eligible due to the agreements.
For those employed in countries with no US Totalization Agreement, there are strategies that can be utilized to accrue Social Security credits while abroad (e.g., being self-employed and filing Schedule C).
It is especially important to accrue sufficient credits because it makes you eligible for Medicare. Healthcare can be one of the most expensive costs during retirement, particularly if you do not have proper health insurance. By becoming Medicare eligible, this enables access to US healthcare in case any significant medical procedures are needed. This is essential as a single medical event can cost hundreds of thousands of dollars. Medicare eligibility mitigates the risk of a medical incident negatively impacting long-term financial plans.
When Should You Start Social Security?
The main point to consider when determining start date is longevity expectations.
The earliest beginning date is age 62 and the latest is age 70. Full Retirement Age is when you receive full benefits; this is age 67 for those born in 1960 or later. Each year benefits are delayed after 67, there is an 8% increased benefit. Before age 67, there is a decreased benefit of 6.67%/yr for the first three years (66, 65, and 64) and a decreased amount of 5%/yr for the next two years (63 and 62). In other words, if beginning Social Security at 62, the total reduced benefit is 30% of the Full Retirement Age amount (6.67% + 6.67% + 6.67% + 5% + 5%).
Circling back to when to start benefits, for those with high longevity expectations (e.g., history of family longevity), it generally makes sense to delay beginning to achieve maximum lifetime benefits.
For those with lower longevity expectations, it could be beneficial to begin earlier. Moreover, for married couples, it is important to consider both spouse’s earnings records, longevity, other assets, risk tolerance, and US status to get the most benefits long-term.
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As planners, we always think about optimizing wealth over time. Social Security & Medicare eligibility provides a steady income stream that can be used to help meet goals and mitigate the risk of a costly healthcare event negatively affecting long-term finances. Whether retirement is approaching, or you are a young professional, like me, it is best to start planning early, have conversations regarding Social Security, and accrue credits if needed.
For assistance with analyzing your Social Security status and how it plays into your long-term financial plan, please reach out to one of our wealth planners.
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