Follow Up: Totalization Agreements and the Windfall Elimination Provision

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As planners, you may come across clients who have worked outside the U.S. In those cases, you need to be aware of how the Windfall Elimination Provision (WEP) may impact workers who receive retirement benefits from both foreign governments and Social Security.

The chance that you are going to encounter clients who have worked abroad may be higher than you think. CNBC recently reported that while the American expatriate population is not formally tracked, there are approximately 7 million Americans working in more than 100 countries. Additionally, this situation may also apply to immigrants and foreign workers who have U.S. earnings. In all of these cases, those who have earned income abroad may come across unique challenges when estimating their Social Security retirement benefits (SSRB).

The Journal of Financial Planning published in its April 2015 issue a peer-reviewed contribution titled “Retirement Planning for Workers Impacted by the Windfall Elimination Provision.” This article explained how workers who have earned a mix of retirement benefits from employment covered by Social Security and from work outside of the Social Security system may face additional complications when estimating their retirement income. The primary author has written this addendum to further address the interaction of the WEP, SSRB, and retirement benefits from foreign governments.

Financial advisers should know that in most cases, the Windfall Elimination Provision (WEP) applies to workers who receive a pension from a foreign government in addition to their U.S. Social Security retirement benefits (SSRB). Even if the worker’s earnings were covered by a bilateral Social Security agreement, which are more commonly referred to as “totalization agreements,” the WEP can still reduce the worker’s SSRB. This situation impacts U.S. workers who are employed outside the U.S. as well as foreign workers employed inside the United States.

Totalization agreements were first put in force in 1978 and currently the U.S. has agreements with 25 countries. The goal of these agreements is to eliminate dual taxation for government-funded retirement programs and to help ensure that workers have enough credits to earn benefits from at least one of those programs. Such factors as which country, the specifics of the agreement, and the length of the employment, will determine which country controls the retirement taxes and benefits.

The key conditions to remember is that the WEP applies when a worker has enough credits to qualify for SSRB and the worker also receives retirement benefits from employment outside the U.S. Social Security system. Both the Social Security Administration and the Internal Revenue Service provide information about this topic on their respective Web sites, and the following link was the main reference for this update. This source includes an overview of Totalization agreements as well as some detail for each agreement with the 25 countries.

For more information, visit the U.S. International Social Security Agreements page, and read more at CNBC.

LauraCooganLaura L. Coogan, Ph.D.
Assistant Professor
Nicholls State University
Thibodaux, LA

One thought on “Follow Up: Totalization Agreements and the Windfall Elimination Provision

  1. I am a recipient of a foreign pension . But I am under a totalization agreement – I did not have sufficient credits to receive the foreign pension on its own, therefore I had to apply under the totalization agreement in which the US Social Security credits are also counted. The foreign pension is not a full pension but is prorated for the years of contribution in that country. The Totalization pension is usually not subject to WEP – depends on country (Switzerland) .

    Social Security docked me when I reported my pension and I had to educate the local office. I wrote to head of Social Security and in ten days they responded and reimbursed me the monies withheld (which were a lot!) . It is best to apply for foreign pension through a US country office if the country has one in the US – Local Social Security branches lack knowledge – and one would want to be sure that the record is correct. In my case I was under more than one name and I would have lost money if the error had not been caught

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