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UK state pension and USA social security

UK state pension and USA social security

Old Jan 26th 2020, 7:42 pm
  #1651  
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Default Re: UK state pension and USA social security

Thanks. I've worked out the amount, but SS has to reduce my monthly payment from their end. And also tell me how to pay back their overpayment.
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Old Jan 26th 2020, 8:09 pm
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Default Re: UK state pension and USA social security

Originally Posted by kodokan View Post
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.
I guess I'm a bit in the middle on this one. It isn't unfair in the context of the way it's calculated for the reasons you outline. But... there would certainly be ways of calculating SS payments differently so that the WEP wouldn't be needed. For example, calculating your average earnings based on the number of years, "x", you contributed And then paying you "x"/35 of the amount you would get if that average had been based on 35+ years of contributions. There have been a number of bills proposed to do exactly that kind of thing and abolish the WEP but afaik all have gone nowhere. I guess it is the arbitrary nature of parts of the WEP that I dislike, For example, what is the maximum WEP amount based on? Why is it limited to half of one's non-SS pensions? Why does it phase out starting at 20+ years of SS contributions? In other words, it feels like a "hack" built on an existing system.

Last edited by Giantaxe; Jan 26th 2020 at 8:18 pm.
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Old Jan 27th 2020, 6:08 am
  #1653  
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Default Re: UK state pension and USA social security

Originally Posted by Butwhy View Post
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.
Could it be that they haven't processed it because they realize how unfair it is? If you had made voluntary UK NI contributions for the same years as you paid SS taxes, you'd now be getting double, a full UK pension. The extra half would've been almost a free gift from the (British) taxpayer, as 2 or 3 pounds a week is only a small fraction (less than 3%) of the market rate payment that you'd have to make for an equivalent annuity. But you elected not to burden the taxpayer, so not only is your pension halved, but whereas the half from the years that you could've doubled and claimed a second pension would not be WEP'd, the half from years when you worked and paid taxes and contributed to one pension is WEP'd!


Last edited by vespucci; Jan 27th 2020 at 6:58 am.
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Old Jan 27th 2020, 10:17 am
  #1654  
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Default Re: UK state pension and USA social security

Now that's an interesting point!
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Old Jan 27th 2020, 10:52 am
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Default Re: UK state pension and USA social security

Originally Posted by morpeth View Post
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.
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.
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Old Jan 27th 2020, 1:44 pm
  #1656  
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Default 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.
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Old Jan 27th 2020, 1:54 pm
  #1657  
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Default Re: UK state pension and USA social security

Originally Posted by Giantaxe View Post
.... Why does it phase out starting at 20+ years of SS contributions? In other words, it feels like a "hack" built on an existing system.
That would be because it is.
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Old Jan 27th 2020, 4:40 pm
  #1658  
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Default Re: UK state pension and USA social security

Originally Posted by kodokan View Post
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.
I always appreciate your thoroughness in analysing a given financial topic. The above full post is an excellent synopsis of the SSA reasoning behind WEP. So, without contradicting the post you made, please allow me to give an alternative viewpoint. Elements of WEP are fair, but WEP can also be very unfair. The SSA explanation for the application of WEP is a bit of smoke and mirrors. It avoids consideration of the many variables which can arise. IMHO, the origin of the WEP problem for US expats/non-residents originates with the Congressionally approved ability to 'opt out' of SS by a resident US wage earner and the need for a solution to the problems opting out causes - the unfair advantage of your explanation. As always, the unfair advantage focuses on the individual who will greatly profit at a cost to others.

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 4:53 pm.
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Old Jan 28th 2020, 10:09 am
  #1659  
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Default Re: UK state pension and USA social security

Originally Posted by adeelmbridgeUK View Post
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.
still have other US income for which need to file US tax return
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Old Jan 28th 2020, 5:00 pm
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Default 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.

Last edited by kodokan; Jan 28th 2020 at 5:03 pm.
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Old Jan 28th 2020, 8:29 pm
  #1661  
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Default Re: UK state pension and USA social security

Originally Posted by kodokan View Post
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.
High earners generally have other pensions too. The UK is fairer as at least the state pension is the same.
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Old Jan 28th 2020, 8:36 pm
  #1662  
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Default Re: UK state pension and USA social security

Originally Posted by vespucci View Post
High earners generally have other pensions too. The UK is fairer as at least the state pension is the same.
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.
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Old Nov 5th 2020, 2:09 pm
  #1663  
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Default 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%?
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Old Nov 5th 2020, 5:25 pm
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Default 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.
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Old Nov 5th 2020, 6:21 pm
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Default Re: UK state pension and USA social security

Originally Posted by lansbury View Post
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.
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/
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