UK state pension and USA social security
#1652
Lost in BE Cyberspace
Joined: Jan 2006
Location: San Francisco
Posts: 12,865
Re: UK state pension and USA social security
The WEPing is because of how Social Security is weighted towards giving more to people who worked all their lives on low incomes. Someone with 35 years of credits based on minimum or low retail wages will end up with a SS pension that’s almost as much as what they earned each month. A higher earner, who actually paid far more into the system than their minimum wage neighbor, will have a SS pension that’s perhaps 20% of what they earned each month. It’s designed to be distributive in this way, through what are called ‘bend points’.
The reason for WEP in a situation like yours, is because the calculation will take your earnings over 20 years and spread them across 35, making it appear that your average annual income during your working life was far lower than it actually was. If SS is your only source of retirement income - maybe due to working life periods of illness, unemployment, caring duties, etc - then the amount is not adjusted because the whole point of SS is to provide a certain bare minimum standard of life to the elderly.
But if, outside of those 20 years, you accrued benefits elsewhere, then you’d have a much higher total retirement income than the algorithm is set to calculate. You’d be getting SS as if you were a low earner who worked 35 years, and unfairly benefitting from a surprisingly (in the US) redistributive element that didn’t apply to you. Because outside of those 20 years, you benefited from being able to accrue credits in an alternative pension scheme, you don’t need the generous SS benefit of a minimum wage earner, versus what you actually paid in as SS taxes, to keep you above the poverty line.
What the WEP is actually doing is re-setting the algorithm, and giving you a SS benefit that’s closer to being based on the 20 years you actually paid into the US system, rather than the default of annualizing your income across the usual 35 years. It’s not trying to be unfair to you, it’s trying to not be unfair to everyone else who contributes, which it would be if it inflated you up to a higher retirement income that you actually need.
It’s actually rather nice that if you genuinely only had worked for 20 years for some reason, the calculation would give you a more generous SS income as a percentage of what you’d earned during those years, and that this is effectively the higher contributions of the higher earners being funneled towards the poorer, lower-contributing retirees. I’m assuming most Americans don’t understand that this is going on, because I don’t hear regular cries of ‘Socialism!’ about it.
The reason for WEP in a situation like yours, is because the calculation will take your earnings over 20 years and spread them across 35, making it appear that your average annual income during your working life was far lower than it actually was. If SS is your only source of retirement income - maybe due to working life periods of illness, unemployment, caring duties, etc - then the amount is not adjusted because the whole point of SS is to provide a certain bare minimum standard of life to the elderly.
But if, outside of those 20 years, you accrued benefits elsewhere, then you’d have a much higher total retirement income than the algorithm is set to calculate. You’d be getting SS as if you were a low earner who worked 35 years, and unfairly benefitting from a surprisingly (in the US) redistributive element that didn’t apply to you. Because outside of those 20 years, you benefited from being able to accrue credits in an alternative pension scheme, you don’t need the generous SS benefit of a minimum wage earner, versus what you actually paid in as SS taxes, to keep you above the poverty line.
What the WEP is actually doing is re-setting the algorithm, and giving you a SS benefit that’s closer to being based on the 20 years you actually paid into the US system, rather than the default of annualizing your income across the usual 35 years. It’s not trying to be unfair to you, it’s trying to not be unfair to everyone else who contributes, which it would be if it inflated you up to a higher retirement income that you actually need.
It’s actually rather nice that if you genuinely only had worked for 20 years for some reason, the calculation would give you a more generous SS income as a percentage of what you’d earned during those years, and that this is effectively the higher contributions of the higher earners being funneled towards the poorer, lower-contributing retirees. I’m assuming most Americans don’t understand that this is going on, because I don’t hear regular cries of ‘Socialism!’ about it.
Last edited by Giantaxe; Jan 26th 2020 at 7:18 pm.
#1653
Forum Regular
Joined: Jul 2018
Location: California
Posts: 254
Re: UK state pension and USA social security
Thank you retman. I'm in the UK so don't have a local SS office. I've been dealing with the FBU at the US embassy in London via email and their online form. They replied initially and copied my state pension information six months ago. My concern is I've not had a reply to several emails asking for an update on when I'll be told the WEP reduction amount. I still believe though that WEP on a govt pension is unfair. It's not a windfall, it's payment from my govt that I paid into, and the amount I paid into the SS system is the same as it was up until I started getting my UK pension. But I know I'm flogging a dead horse. Rules are rules even if they don't always make sense. In the meantime I need to contact someone other than the London FBU before I owe too much more. Thanks again.
Last edited by vespucci; Jan 27th 2020 at 5:58 am.
#1655
Just Joined
Joined: Jan 2016
Posts: 6
Re: UK state pension and USA social security
Actually for anyone who may know answer .If one receives social security but resident in Uk I understand per tax treaty not taxed in USA, but one still has to file USA return is the social security not shown or on the line for social security non taxable ? Are any other steps required to not pay tax on the social security receive abroad when filing US tax return.
#1656
Just Joined
Joined: Jan 2020
Posts: 8
Re: UK state pension and USA social security
I am in the same position and no longer have to file us tax returns since officially rescinding my green card a few years ago. Worked with the excellent expat dept of H&R Block in the US to get it all sorted.
#1657
#1658
BE Forum Addict
Joined: Apr 2011
Location: The Shire
Posts: 1,117
Re: UK state pension and USA social security
What the WEP is actually doing is re-setting the algorithm, and giving you a SS benefit that’s closer to being based on the 20 years you actually paid into the US system, rather than the default of annualizing your income across the usual 35 years. It’s not trying to be unfair to you, it’s trying to not be unfair to everyone else who contributes, which it would be if it inflated you up to a higher retirement income that you actually need.
Some basics to keep in mind: your $480/mo. ($5,760/yr.) max WEP figure, or, given the 50% reduction, a total foreign pension income of $11,520/yr. to generate max WEP.
The above quote is correct; the algorithm is reset and a new calculation is made, but, in most cases, the new calculation has nothing to do with the eventual application WEP. It simply determines if the 'adjusted' amount is lower or higher than the normally calculated amount. The SSA will always allow the figure giving the highest benefit for the applicant to be used. Given that fact, logic says if the recalculated amount, on its own, were larger than the normal calculation minus a WEP amount, the SSA would pay the recalculated amount with no WEP applied. I've never heard of this happening. Either there are non-contributing years and a compensator (WEP) is applied - the normal calculation, or the benefit is made strictly on the years and amounts where contributions were made and no additional compensator (WEP) for non-contributing pensions could be justifiable. Which may be why I've never heard of such a situation.
To check this, use the WEP calculator from the SSA site. On a printout of the entire calculation (10 to 12 pages if memory serves me right), it will (or, it used to....) display all scenarios.
In most situations where non-contributory pensions exceed the max income ($11,520/yr. currently), and once the SSA reps determine foreign pensions total more than that amount, the predetermined max WEP amount will be subtracted from the normally calculated SSA benefit figure in order to arrive at the final benefit amount.
There are several issues arising from the original concept of WEP as applied for US resident wage earners (opt outs) verses the treatment of the expat/non-res with foreign pensions. As for unfairness to those with foreign pensions, I won't even bother to go into exchange rate variations at the time of application. That is a lottery.
The unfairness can arise for those with limited pension income availability. Person A may have a total yearly income of $18,000 composed of a $6,000 normally calculated SS pension and the equivalent of $12,000 in a foreign pension. $18,000/yr. is not profiteering via 'opt out', and in this case Person A will lose $3,000 (the 50% rule applied to the SS amount), or -17% of their total yearly income. -17% may be a lot to Person A.
Person B may have a total yearly income of $180,000 composed of a $16,000 normally calculated SS pension and the equivalent of $164,000 in a foreign pension. $180,000/yr. is ample, and the loss via WEP may be easily justified. But, the WEP amount is only $5,760 (the yearly max WEP amount), or 3% of their total yearly income.
A loss of 17% to Person A will be much more severe than the 3% loss of Person B; and no amount of WEP compensator justifications makes it any fairer.
In the above, Person A and B both had the required 10 years of substantial earnings. If B had only 9 SSA years of substantial earnings, and used UK contributory years via the totalisation agreement to qualify for an SS benefit, they would not be subject to any WEP, or a 0% loss on $180,000. Does Person A feel WEP is fair?
Last edited by theOAP; Jan 27th 2020 at 3:53 pm.
#1659
Lost in BE Cyberspace
Joined: Jul 2016
Posts: 10,006
Re: UK state pension and USA social security
I am UK national /resident and receive my US SS gross (in sterling into my UK bank account) without any US tax deductions due to US/UK tax treaty.It is declared on my UK tax return as taxable income. If this is the only US generated income and you are not US perm resident/citizen then I understand no need to file US tax return.
#1660
BE Forum Addict
Joined: Apr 2011
Location: Ohio
Posts: 1,834
Re: UK state pension and USA social security
Excellent further analysis, theOAP. You’re right, all/ most systems where a fixed line is being drawn will create different outcomes depending on people’s life choices and opportunities. I guess the ideological intention of SS is to create a floor that prevents too many people falling into retirement poverty, not to penalize people who’ve managed to earn a vey income during their life, and made ample pension savings over that time.
In that way, SS is fairer than the UK system of a fixed output for all (who meet 35 years of contributions) regardless of input amounts. High UK earners will pay vastly more in contributions over their working life, with no increase to their state pension at the end. But a fixed payment amount system is certainly easier to plan for than one based on earnings, then band-aided to fix the ‘errors’ created by the use of distributive bend points.
In that way, SS is fairer than the UK system of a fixed output for all (who meet 35 years of contributions) regardless of input amounts. High UK earners will pay vastly more in contributions over their working life, with no increase to their state pension at the end. But a fixed payment amount system is certainly easier to plan for than one based on earnings, then band-aided to fix the ‘errors’ created by the use of distributive bend points.
Last edited by kodokan; Jan 28th 2020 at 4:03 pm.
#1661
Forum Regular
Joined: Jul 2018
Location: California
Posts: 254
Re: UK state pension and USA social security
Excellent further analysis, theOAP. You’re right, all/ most systems where a fixed line is being drawn will create different outcomes depending on people’s life choices and opportunities. I guess the ideological intention of SS is to create a floor that prevents too many people falling into retirement poverty, not to penalize people who’ve managed to earn a vey income during their life, and made ample pension savings over that time.
In that way, SS is fairer than the UK system of a fixed output for all (who meet 35 years of contributions) regardless of input amounts. High UK earners will pay vastly more in contributions over their working life, with no increase to their state pension at the end. But a fixed payment amount system is certainly easier to plan for than one based on earnings, then band-aided to fix the ‘errors’ created by the use of distributive bend points.
In that way, SS is fairer than the UK system of a fixed output for all (who meet 35 years of contributions) regardless of input amounts. High UK earners will pay vastly more in contributions over their working life, with no increase to their state pension at the end. But a fixed payment amount system is certainly easier to plan for than one based on earnings, then band-aided to fix the ‘errors’ created by the use of distributive bend points.
#1662
Lost in BE Cyberspace
Joined: Jan 2006
Location: San Francisco
Posts: 12,865
Re: UK state pension and USA social security
It depends how you define "fair". It is certainly true that a fixed payment avoids some of the issues we see with US SS. Otoh it is more redistributive due to that fixed payment and the fact that NI contributions are based on income (up to a threshold). And, remember, that the UK's NHS is probably the biggest redistributor for retired people given that it's largely paid for out of general taxation and is "free at the point of service". Many Americans - and some Brits - would argue that that redistribution makes the UK system less fair.
#1663
Re: UK state pension and USA social security
does anyone know how a pension withdrawal from a private UK pension would be taxed in the USA?
almost-ex OH is 55 years old and has the right to withdraw 25% from his UK(Scottish) private pension. He's not claiming US SS pension - just making a withdrawal. In the UK no tax is due. Will he be able to deduct his contributions to the pension from his salary at the time so that only interest+employer contributions are taxed. Or, is tax due on the whole 25%?
almost-ex OH is 55 years old and has the right to withdraw 25% from his UK(Scottish) private pension. He's not claiming US SS pension - just making a withdrawal. In the UK no tax is due. Will he be able to deduct his contributions to the pension from his salary at the time so that only interest+employer contributions are taxed. Or, is tax due on the whole 25%?
#1664
Re: UK state pension and USA social security
My understanding is this, if it is the 25% tax free allowed in the UK taken in one go. If he is only a UK citizen, it is not taxable in the US. If he is a US citizen it is taxable in the US.
#1665
Just Joined
Joined: Sep 2009
Posts: 17
Re: UK state pension and USA social security
If this payment is taxable, then it will be taxable to US persons, not just US citizens. "US persons" includes US citizens, US residents, and may also include resident aliens who live overseas but have not relinquished their green card/