Foreign pensions and Social Security: The world of benefit formulas, windfalls and offsets

I’ve commented many times before that Social Security is a global phenomenon. Almost every country on the planet has a Social Security system in place for its citizens. Many countries had social insurance plans long before we got around to implementing our program in 1935.
In our global economy, it is not uncommon for people to have lived and worked in two or more countries, and thus potentially qualify for Social Security benefits from different countries. How a foreign pension may interact with U.S. Social Security benefits is the subject of today’s column.
Q: I have lived and worked in the United States for the past 15 years. But I was born in Great Britain and worked there for about 30 years before moving to the states. I am 67 years old and about to retire. I get a British Social Security pension and just applied for my American Social Security benefits. Before I did so, the estimates the Social Security Administration mailed me said I would get about $900 per month. But when I filed my claim, I learned I would only get about $450. A Social Security Administration phone rep I talked to said this is because I was double-dipping, and the law didn’t allow me to do this. I think this is totally unfair. I paid into both social insurance systems and think I should get full benefits from both programs. I plan to appeal. Can you help me?
A: You can appeal if you want. But you are not going to win your case. The SSA phone rep misled you by using the term “double-dipping.” That is not why your U.S. Social Security benefit will be reduced. It will be reduced because, without the reduction, you would be getting an unintended windfall in retirement benefits. The law that applies to you is called the “windfall elimination provision,” or WEP.
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To understand the reasoning behind the law, I’ve got to explain something about our Social Security retirement system. There are social goals that have been built into that system since the program began in 1935. One of those goals is to help raise the standard of living for poorer people when they retire. The way that is done is with a retirement benefit formula skewed in their favor. That formula gives poorer people a better deal – or more specifically, a higher rate of return – than is paid to wealthier people. When I am talking about a “rate of return,” I am talking about comparing their Social Security benefit to their average preretirement income.
This formula can best be expressed in terms of percentages. A poor person could potentially get a Social Security benefit that represents up to 90% of his or her average preretirement wage. A well-to-do person will get significantly less – maybe in the 25% range. The rich person is still going to get a much higher Social Security benefit, because 25% of his or her income is way more than 90% of the poor person’s income. But still, the poor person gets a better deal out of Social Security.
The return rate payable to the average person, a typical middle-class worker, is in the 40% range: He or she can expect to get a Social Security retirement check that represents about 40% of his or her preretirement income.
Now, let’s discuss the “windfall” that you are getting. All Social Security retirement benefits are based on a 35-year base of earnings. You said you worked in this country for only 15 years. That means there are 20 years of “zero” earnings on your Social Security record. The SSA’s computers thought you were poor because of all those zero earning years. So they initially gave you a preretirement estimate intended for a poor person, with something close to the 90% return rate.
Those computers didn’t know that you are not really poor. They didn’t know that you spent all those years working in another country and earning a retirement pension from that country. But once you actually filed for benefits and told the Social Security people that you spent all those years working in England and earning a British retirement pension, they then used the windfall elimination provision formula to refigure your benefit.
In other words, that $900 monthly benefit rate you were quoted in the letters was based on the 90% rate of return. But again, you are not poor. You are a middle-class person and should get the same rate of return that all middle-class people in this country get. So that $450 monthly benefit you will receive was based on the WEP formula that gives you the same 40% return rate that all average Americans get.
Q: I am a Canadian citizen who moved to the U.S. in 2010. About two years ago, I married a woman who is a U.S. citizen. We are both age 66. She just filed for her Social Security and will get $2,800 per month. My Canadian Social Security pension is $3,200 per month. Am I able to claim husband’s benefits on my wife’s U.S. Social Security record? When my wife filed for her Social Security, the representative she talked to said no. But I know of other Canadians living here who do get spousal benefits from Social Security.
A: Obviously, I don’t know all the facts about your case. So there may be something I am missing. But based on what you told me, the Social Security agent misinformed you. You should be able to collect $1,400 per month in husband’s benefits on your wife’s Social Security record.
Having said that, I will make this point. I think our Social Security laws on this issue are wrong and need to be changed. I’ll use some examples to explain why.
Bill is a U.S. citizen who spent his life paying into Social Security and now collects $2,600 per month in retirement benefits. His wife, Ann, gets her own Social Security check amounting to $1,800 per month. Bill can’t get any husband’s benefits on Ann’s Social Security record because his own retirement benefit offsets any spousal benefits. For that matter, Ann can’t get any of Bill’s Social Security (at least before he dies) because her retirement benefit offsets any spousal benefits she would be due.
There is something called the “government pension offset” law that usually prevents someone who is getting a non-Social Security retirement pension from getting Social Security dependent benefits from a spouse. But for some reason that I can’t explain, there is a loophole in that offset law for foreign pensions. You are going to be able to get your Canadian retirement pension and a full dependent husband’s benefit from the U.S. Social Security system. So go ahead and jump through that big loophole. But I just don’t think it’s right.