Social Security & Taxation
US Social Security
Since the first legislation on US social security was passed in 1935, in order to alleviate poverty during the Great Depression, this government program has been expanded to offer a variety of services. Most plans are aimed at senior citizens, people with disabilities, and survivors from families whose main wage-earner has died.
Furthermore, there are some measures to help impoverished families (Temporary Assistance for Needy Families) and to provide health insurance to the elderly (Medicare), the poor (Medicaid), and children in need (State Children’s Health Insurance Program).
In this overview, we are going to focus on what US social security means for the working population and their retirement years. As most expats move to the United States to begin a new job, or to start a new life with their spouse, they will hopefully not need to fall back on financial assistance through welfare any time soon. Unfortunately, an unexpected death in the family or a disabling accident can happen to anyone, though.
If you would like to know more about disability benefits or help for survivors, please have a look at the online information provided by the US Social Security Administration (SSA) for the disabled and the bereaved. For details on Medicaid and especially Medicare, the health insurance plan for senior citizens, just read on in our guide to healthcare in the United States.
Social Security Coverage
In 2013, 96% of all workers in the USA were covered by the federal program. Some public-sector employees, e.g. in the federal civil service, as well as on the state or local level, are excluded from coverage. Moreover, special regulations may apply, amongst others, to members of the US military, farm laborers, or employees of non-profit churches.
For most other people working in the United States, social security benefits are funded through payroll taxes. A certain percentage is automatically deducted from their gross income. This part of their earnings is used to pay for the retirement, disability, or survivors benefits of people currently entitled to social security. Once you reach retirement age, your benefits will be paid by the future generation of workers.
Funding and Credits
The federal payroll taxes for social security funding amount to 12.4% of your gross income (up to an income limit of $113,700 a year). If you are employed, your company has to pay half of this sum, i.e. 6.2%, for you. However, unlike this so-called FICA tax for employees, self-employed people have to pay SECA and contribute all of the 12.4% on their own.
Furthermore, both groups need to add a 2.9% levy to sponsor Medicare healthcare payments. Again, employees split this sum evenly with their employer. From 2013 onwards, high-income earners have to chip in with an additional Medicare payment. If you are a highly-paid expat with an individual income of more than $200,000 a year, another 0.9% of your annual earnings will go to the healthcare fund.
For every year you pay into US social security, you receive so-called credit points or credits. For all yearly earnings of $1,160, you earn one credit, and you can collect up to four credit points per year. To become eligible for retirement benefits, you need to gather a minimum of 40 credits. Thus, you need to work at least 10 years, during which you earn more than $4,640 before taxes per year. To receive disability or survivors benefits, different credit requirements may apply.
Your Social Security History
Your record of contributions to US social security is tracked via your personal account. If you want to start working in the USA, you normally need a social security number (SSN). Expats applying for an employment permit from abroad can obtain their SSN together with their work visa. If you come to the US first and then get a job later on, contact your local social security office and ask for help. You can even get a social security number for your baby if you give birth in the US.
To ensure that the SSA has your complete and correct information, always check the wage and tax statement (form W2) you receive from your employer and see if payroll taxes are deducted properly. Self-employed expatriates should double-check their tax return before handing it in to the IRS. Also, all name changes (e.g. in the case of a marriage or divorce), as well as changes in immigration status or citizenship, must be reported to the SSA as soon as possible.
To keep track of the relevant info yourself, you can create an SSA online account. It allows you to access your official social security statement. It records all your earnings and contributions, and it displays estimates of your government benefits at the official retirement age, at a younger age, and for a deferred pension, e.g. at age 70.
Retiring in the US
You can start withdrawing a US government pension at the age of 62, though it will be lower than the benefits you’d get at the official retirement age. The latter is currently being raised from 65 to 67. From 2027 onwards, senior citizens will not get full retirement benefits till their 67th birthday.
At the moment, 57 million people are receiving social security benefits in the US; 40 million of them are retirees and their dependent family members (spouse and children under 16). The average sum paid to a retired worker was $1,261 in 2013, while a couple of retirees received roughly $2,000.
However, you generally get only 40% of your average life-time earnings from social security. Experts say that you need between 70% and 80% to live comfortably in your old age. Therefore, you should arrange for additional retirement provisions on your own. We talk about the most common kind of individual pension plan in our guide to the so-called 401k scheme.
In the second part of this article, we will take a look at US social security agreements and what they mean for expatriates.
We do our best to keep this article up to date. However, we cannot guarantee that the information provided is always current or complete.