Retirement benefits provided by Social Security (SS) are an important element of retirement planning, and can be considered like an annuity that's indexed to inflation. While most Americans give more serious attention to their SS benefits as they near retirement, US citizens living abroad can have attractive planning opportunities that warrant earlier consideration.
Briefly, those born after 1960 are eligible for full retirement benefits at age 67. Benefits can be claimed early from age 62, but doing so can permanently reduce annual benefit by 25%-30%. Claiming can be delayed until age 70, for which annual benefits will be increased by 8% per year.
For a single person deciding when to take retirement benefits, it is important to understand that the government's actuaries have calculated the benefits so that someone with an average life expectancy will collect the same present value of benefits regardless of when the benefits begin. If you receive benefits long enough, there’s a point where the delayed benefits received will total more than those started at an earlier age. This “breakeven” generally happens when you’re in your early 80s.
In evaluating a claiming strategy, a key question is how does the life expectancy of the claimant compare to the national average. This consideration is important for men in good health and for women who tend to live longer than men, for whom a lifetime annuity can prove to be more valuable. In addition to life expectancy, other important factors to consider are the expected rate-of-return on investments and inflation. Lower expected rates-of-return and higher anticipated inflation increase the value of deferring claims for a higher benefit.
For US expats in Israel, we would highlight a few other considerations.
Wages earned abroad from a foreign employer are not subject to SS payroll taxes. Importantly, though, foreign self-employment income is subject to both the employer and employee shares of the taxes, which along with Medicare taxes, total 15.3% of earnings.
The US has SS treaties with many countries, but not with Israel. While the US-Israel tax treaty significantly reduces double taxation of earned and passive income, self-employed individuals must pay both Bituach Leumi and SS on their income. As such, many individuals who would otherwise be self-employed set up companies or make other arrangements to eliminate this obligation.
To be eligible for SS benefits in retirement, one must have had 40 quarters of wages (for most people 10 years) that were subject to SS payroll taxes. As such, those who relocate out of the US before they have accrued their 40 quarters of credit might consider whether it is worthwhile and how they might accumulate the missing quarters.
This analysis must consider an important and lesser known element of the SS program called the Windfall Elimination Provision (WEP).
Under the WEP, for those who receive a foreign pension (certain limits apply) and have less than 20 years of covered SS earnings, their monthly benefits are reduced by up to $557.5, or $6,690 per year in 2023 dollars. The WEP phases out annually on a straight line basis over years 21-30 of covered substantial earnings ($29,700 in 2023). SS program numbers are adjusted annually for wage and cost inflation.
It is important to consider the WEP in evaluating the appeal of completing missing quarters for SS benefit eligibility, as the base retirement benefits of someone with a foreign pension are significantly lower than they might otherwise be.
There is, though, another interesting planning strategy for someone living abroad to phase out the WEP by accruing 30 years of substantial earnings.
For someone who can recast wages or dividends as self-earnings and pay the associated payroll taxes for years 21-30, the associated higher retirement lifetime benefits appear to provide an attractive positive, low risk, and inflation protected return, as compared to the additional FICA tax contributions. The return can be further increased if spousal benefits will also be based on these increased benefits.
Though the rate of return will be lower for someone who contributes for years before 21, in order to be eligible for the phaseout, in many cases it will still be quite attractive to do so. Each year’s contribution from year 21 has it’s independent return and is not dependent on other year’s contributions.
Identifying the best SS claiming strategy can significantly boost lifetime benefits, but analyzing all relevant factors can be quite complex. We find that the software platform "Maximize My Social Security" can be helpful in sorting through such government benefits questions, and we often recommend consulting with an expert to do a more thorough review of a case.
You can find a more in-depth description of the WEP here, and please let us know if we can help you consider your Social Security planning options, including a referral to a qualified expert.
The information contained in this article has been provided for information purposes only. It does not constitute any form of advice nor recommendation to buy or sell any securities or to adopt any investment, Social Security, or tax strategy mentioned therein. It is intended only to provide observations and views of the author(s) at the time of writing, both of which are subject to change at any time without prior notice. The information contained herein is derived from sources deemed by MaimonWealth to be reliable but its accuracy and completeness cannot be guaranteed. This material does not have regard to specific investment objectives, financial situation, tax or Social Security standing, or the particular needs of any specific person who may read it. Any views regarding future prospects may or may not be realized. Past performance is no guarantee of future results.