Social Security Totalization Agreements: How Benefits Are Calculated for Expats

Social Security - Totalization Agreements

The U.S. Social Security system generally requires individuals to earn a minimum amount of covered work in order to qualify for retirement, disability, or survivor benefits. For U.S. citizens and lawful permanent residents who spend part of their careers working outside the United States, meeting these requirements can be challenging. To address this issue, the United States has entered into Social Security Totalization Agreements with a number of foreign countries.

These agreements are designed to coordinate social security systems between countries and provide relief for individuals with cross-border work histories.

Purpose of Social Security Totalization Agreements

Social Security Totalization Agreements serve two primary purposes. First, they help eliminate dual social security taxation, which can occur when an individual is required to pay social security taxes to both the United States and a foreign country on the same earnings. Second, they help individuals qualify for benefits when their work history is divided between the U.S. and another country.

The United States currently has totalization agreements with more than 30 countries, including Canada, the United Kingdom, Germany, France, Japan, South Korea, and Australia. While each agreement contains country-specific provisions, the general principles are largely consistent.

Social Security Coverage and Eligibility Requirements

Under U.S. law, an individual generally needs 40 quarters of coverage, equivalent to approximately 10 years of work, to qualify for Social Security retirement benefits. Expats who spend a significant portion of their careers abroad may not meet this requirement based solely on U.S. employment.

Totalization agreements allow U.S. Social Security credits to be combined with credits earned under a foreign social security system for purposes of meeting the minimum eligibility requirement only. The combined credits are used solely to determine whether the individual qualifies for benefits.

Determining Eligibility Under a Totalization Agreement

If an individual does not have enough U.S. quarters of coverage to qualify independently, the Social Security Administration (SSA) will consider the individual’s periods of coverage under the foreign system. If the combined U.S. and foreign coverage meets the minimum requirement, the individual may qualify for U.S. benefits under the applicable totalization agreement.

For example, an individual with several years of U.S. employment and additional years of coverage in a totalization country may qualify for U.S. Social Security benefits even though the 40-quarter requirement is not met based on U.S. employment alone.

Calculation of U.S. Social Security Benefits

Once eligibility is established, the SSA calculates the U.S. benefit based only on the individual’s U.S. earnings history. Foreign earnings are not included in the U.S. benefit calculation.

The benefit is calculated on a pro-rata basis. The SSA first determines a theoretical benefit as if the individual had a full U.S. career at their actual U.S. earnings level. The benefit is then reduced proportionately based on the number of years of U.S. coverage relative to the total combined coverage.

As a result, individuals who worked fewer years under the U.S. system generally receive a reduced benefit. Totalization does not increase the benefit amount; it allows the individual to qualify for benefits that would otherwise be unavailable.

Foreign Social Security Benefits

Foreign social security benefits are calculated separately by the foreign country in accordance with its own laws. Similar to the U.S. system, the foreign country typically pays benefits only for the years during which contributions were made to that country’s system.

In many cases, individuals receive separate benefit payments from the United States and the foreign country. These benefits are coordinated under the totalization agreement but are not combined into a single payment.

Disability and Survivor Benefits

Totalization agreements also apply to Social Security disability and survivor benefits. If an individual becomes disabled or dies before earning sufficient U.S. coverage independently, combined coverage under a totalization agreement may allow the individual or eligible family members to qualify for benefits.

Social Security Taxes While Working Abroad

In addition to benefit coordination, totalization agreements address where social security taxes are paid. In general, individuals pay social security taxes only to the country where they are working, which helps prevent double taxation.

For U.S. citizens working abroad, this may result in exemption from U.S. Social Security and Medicare taxes if the individual is covered under a foreign social security system and the applicable agreement applies. Proper documentation, such as a certificate of coverage, is typically required.

Key Considerations for Expats

Expats and internationally mobile individuals should maintain records of where social security taxes are paid, confirm whether their host country has a totalization agreement with the United States, and understand how these agreements may affect long-term retirement planning. Claims involving foreign coverage often require additional documentation and coordination with foreign agencies and may take longer to process.

Social Security Totalization Agreements can play an important role in helping expats qualify for benefits when their careers span multiple countries. However, benefits are calculated separately by each country and are based solely on periods of coverage under each system. Understanding how these rules apply is essential for accurate planning and realistic expectations. If you have questions about how your U.S. and foreign work history may impact your Social Security benefits, reach out to info@mkhstaxgroup.com.