FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

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Topic Author
wineandplaya
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FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by wineandplaya »

I'm trying to understand how to independently qualify for both US Social Security and EU state pension(s) and what kind of benefits to expect so that I can feed it into my FIRE calculations. For reference, I'm currently 39 year old and have around 10-15 years of qualifying contributions in (as of now) three different countries in Europe (haven't made an exact calculation). In addition, I currently have 5 years of qualifying contributions in the US (20 Social Security credits) where I now live.

On the US side, things seem pretty clear. I need to work at least 40 quarters to qualify for Social Security and Medicare without needing to invoke totalization agreements (which I want to avoid), that is another 5 years. My average monthly earnings will then be the average over 35 years. If I only work 10 years and my salary is above the Social Security wage limit (currently $143k/yr), then my early earnings will be in the order $143k * 10 / 35 = $41k/yr or an AIME of around $3400. I ignore indexing as it should be mostly compensated by changes to the Social Security wage limit. If I understand the Social Security formula right, I should then get around 40 % of the first $996 (down from 90 % due to the Windfall Elimination Provision triggered by EU pension) and then 32 % of the remainder, so some $1200/mo or $14k/year in 2021 dollars.

For EU state pensions, my understanding is that I need to qualify for benefits independently in each country. I will then be able to use years of service in other EU countries as described here: https://europa.eu/youreurope/citizens/w ... dex_en.htm

For Spain (which is relevant to me), I need at least 15 years of service out of which at least 2 years need to be in the 15 years before the start of entitlement. So, if my entitlement starts at age 67, I can qualify if I work in Spain from age 52 to 54. My pension will then be prorated by the years I actually worked in Spain. I then need to separately qualify for pension in the other European countries I've worked and can then add the corresponding prorated state pension to my Spanish pension (Spain will handle the collection of pensions from other European countries). Do I need to consider my US Social Security here or can this be kept separate? Can I choose to invoke the totalization agreement between US and the corresponding European country if it's beneficial to me?
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Hyperborea
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by Hyperborea »

If you qualify for other pensions earned while not paying into US Social Security then your Social Security payments will be subject to the Windfall Elimination Provision (WEP). That means that your SS could be reduced by as much as 50% of the amount you receive from other such pensions.
It’s hard to win an argument with a smart person, it's damn near impossible to win an argument with a stupid person. - Bill Murray
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wineandplaya
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by wineandplaya »

Hyperborea wrote: Sun May 09, 2021 7:01 pm If you qualify for other pensions earned while not paying into US Social Security then your Social Security payments will be subject to the Windfall Elimination Provision (WEP). That means that your SS could be reduced by as much as 50% of the amount you receive from other such pensions.
My understanding is that WEP basically decreases the benefit for the first $996 of AIME from 90 % to (as low as) 40 %.
halfnine
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by halfnine »

OTOH, and without crosschecking your assumptions, your final SS numbers look about right. Without consideration of the WEP, your calculations yield around 20K/yr in Social Security. I have a similar work history to yours in the USA and am expecting around the same. So, I would say you are in the right ballpark. As to the WEP, my understanding is your Social Security payment can not be reduced by more than 50% of your other (EU in this case) pension. So, crudely, up to the first 1000 USD per month you receive in a foreign pension the US will reduce your payments by half that amount. Above and beyond that you would not have any further penalty. So, you could look at how many years of contributions in Spain it will take you to receive around 1K USD and just recognize that each of those years you are only ultimately getting half credit. Obviously, all these numbers are in real terms for 2021.
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

halfnine wrote: Sun May 09, 2021 11:32 pm OTOH, and without crosschecking your assumptions, your final SS numbers look about right. Without consideration of the WEP, your calculations yield around 20K/yr in Social Security. I have a similar work history to yours in the USA and am expecting around the same. So, I would say you are in the right ballpark. As to the WEP, my understanding is your Social Security payment can not be reduced by more than 50% of your other (EU in this case) pension. So, crudely, up to the first 1000 USD per month you receive in a foreign pension the US will reduce your payments by half that amount. Above and beyond that you would not have any further penalty. So, you could look at how many years of contributions in Spain it will take you to receive around 1K USD and just recognize that each of those years you are only ultimately getting half credit. Obviously, all these numbers are in real terms for 2021.
IT seems two concepts are being mixed
As the OP mentions, you only reduce the PIA portion for the first bending point, from 90% up to 40%. This is independent of the amount of the foreign pension.
But then, if your foreign pension is small, your PIA will increase. If your PIA is $1600 w/o WEP, and $1200 w/ WEP, and you have a foreign pension of $500, then the actual PIA becomes $1600-($500/2) = $1350. If your foreign pension is > $800, then you still get a PIA $1200 no matter what.

https://www.ssa.gov/policy/docs/program ... ision.html

That's my understanding, let me know if it's not correct.
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

wineandplaya wrote: Sun May 09, 2021 10:48 am
For EU state pensions, my understanding is that I need to qualify for benefits independently in each country. I will then be able to use years of service in other EU countries as described here: https://europa.eu/youreurope/citizens/w ... dex_en.htm
Interesting. So it seems for EU pensions, there are not totalization agreements between countries, just a global agreement between all EU members.
For countries were you worked only a little time, it seems you use a EU-equivalent rate. So you may be better off if you worked where pensions were more generous (respect to what you contributed, imagine a country with low expectancy life-)

I am not sure if any EU country has a progressive pension system (like US, with bending points). This could further skew the numbers.
halfnine
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by halfnine »

international001 wrote: Mon May 10, 2021 10:16 am
halfnine wrote: Sun May 09, 2021 11:32 pm OTOH, and without crosschecking your assumptions, your final SS numbers look about right. Without consideration of the WEP, your calculations yield around 20K/yr in Social Security. I have a similar work history to yours in the USA and am expecting around the same. So, I would say you are in the right ballpark. As to the WEP, my understanding is your Social Security payment can not be reduced by more than 50% of your other (EU in this case) pension. So, crudely, up to the first 1000 USD per month you receive in a foreign pension the US will reduce your payments by half that amount. Above and beyond that you would not have any further penalty. So, you could look at how many years of contributions in Spain it will take you to receive around 1K USD and just recognize that each of those years you are only ultimately getting half credit. Obviously, all these numbers are in real terms for 2021.
IT seems two concepts are being mixed
As the OP mentions, you only reduce the PIA portion for the first bending point, from 90% up to 40%. This is independent of the amount of the foreign pension.
But then, if your foreign pension is small, your PIA will increase. If your PIA is $1600 w/o WEP, and $1200 w/ WEP, and you have a foreign pension of $500, then the actual PIA becomes $1600-($500/2) = $1350. If your foreign pension is > $800, then you still get a PIA $1200 no matter what.

https://www.ssa.gov/policy/docs/program ... ision.html

That's my understanding, let me know if it's not correct.
I believe we are in agreement but I probably didn't explain it very well. In my example above I am looking at a PIA of $2000 w/o WEP and $1500 w/ WEP. Once their foreign pension exceeds $1000 they would get a PIA of $1500 no matter what. Below $1000, though, for every $2 in foreign pension they receive their PIA will drop $1 from the initial $2000.

Anyway, that is my understanding as well. Someone can correct us if we are wrong.
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wineandplaya
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by wineandplaya »

international001 wrote: Mon May 10, 2021 10:27 am Interesting. So it seems for EU pensions, there are not totalization agreements between countries, just a global agreement between all EU members.
For countries were you worked only a little time, it seems you use a EU-equivalent rate. So you may be better off if you worked where pensions were more generous (respect to what you contributed, imagine a country with low expectancy life-)
My understanding is that you calculate the pension for each country separately, in a prorated way, and then all the payouts are administered by the country of residence. Or, if you no longer live in the EU, in your last country of residence. My guess is that you leave any US Social Security out completely in that calculation, but it's not quite clear to me if that's the case.

The differences in life-expectancy are relatively small. What matters more are the differences in income level. GDP/capita in Norway is more than double that of Spain. So your pension contribution from there will probably be correspondingly larger. There is also big differences in how generous the systems are.
oslocal
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by oslocal »

Good thread and interesting learning so far.

I am looking at my state pension account in Norway which shows that about 18.1% of my earnings are added to the account each year, with a wage cap of about 720K NOK ($85-90K). (You and your employer still contribute social security taxes on all wages.)

The account represents something like an annuity base, or "PIA"

Your account is indexed each year by the average wage increase in the country
2017 account indexing was 1.14%
2018 account indexing was 3.47%
2019 account indexing was 3.07%
2020 account indexing was 1.50%

Their life expectancy evaluated the year you turn 61 provides for a table of denominators that are used to calculate the annual pension amount.
For example, people born in 1958 have denominators ranging from 19.63 to 9.39 depending on whether when they start taking benefits between age 62 and 75. For people born in 1959, the numbers are 19.77 to 9.51.

So if your pension balance is 3,000,000 (~42 years at 400K per year) and you take benefits from age 62, you will get for example 152,827 each year (1958 issue) or 151,745 (1959 issue)

I don't know if this is better or worse than Social Security. Would it be roughly equal to an AIME of $4000 (48K per year income) which would provide for about 1759 in PIA, which would be about 21,100 each year at FRA?

Interestingly I just found out I have 39 SS credits... :oops:
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

halfnine wrote: Mon May 10, 2021 10:37 am
international001 wrote: Mon May 10, 2021 10:16 am
halfnine wrote: Sun May 09, 2021 11:32 pm OTOH, and without crosschecking your assumptions, your final SS numbers look about right. Without consideration of the WEP, your calculations yield around 20K/yr in Social Security. I have a similar work history to yours in the USA and am expecting around the same. So, I would say you are in the right ballpark. As to the WEP, my understanding is your Social Security payment can not be reduced by more than 50% of your other (EU in this case) pension. So, crudely, up to the first 1000 USD per month you receive in a foreign pension the US will reduce your payments by half that amount. Above and beyond that you would not have any further penalty. So, you could look at how many years of contributions in Spain it will take you to receive around 1K USD and just recognize that each of those years you are only ultimately getting half credit. Obviously, all these numbers are in real terms for 2021.
IT seems two concepts are being mixed
As the OP mentions, you only reduce the PIA portion for the first bending point, from 90% up to 40%. This is independent of the amount of the foreign pension.
But then, if your foreign pension is small, your PIA will increase. If your PIA is $1600 w/o WEP, and $1200 w/ WEP, and you have a foreign pension of $500, then the actual PIA becomes $1600-($500/2) = $1350. If your foreign pension is > $800, then you still get a PIA $1200 no matter what.

https://www.ssa.gov/policy/docs/program ... ision.html

That's my understanding, let me know if it's not correct.
I believe we are in agreement but I probably didn't explain it very well. In my example above I am looking at a PIA of $2000 w/o WEP and $1500 w/ WEP. Once their foreign pension exceeds $1000 they would get a PIA of $1500 no matter what. Below $1000, though, for every $2 in foreign pension they receive their PIA will drop $1 from the initial $2000.

Anyway, that is my understanding as well. Someone can correct us if we are wrong.
Yes.. that's the same than my math
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

wineandplaya wrote: Mon May 10, 2021 11:13 am
international001 wrote: Mon May 10, 2021 10:27 am Interesting. So it seems for EU pensions, there are not totalization agreements between countries, just a global agreement between all EU members.
For countries were you worked only a little time, it seems you use a EU-equivalent rate. So you may be better off if you worked where pensions were more generous (respect to what you contributed, imagine a country with low expectancy life-)
My understanding is that you calculate the pension for each country separately, in a prorated way, and then all the payouts are administered by the country of residence. Or, if you no longer live in the EU, in your last country of residence. My guess is that you leave any US Social Security out completely in that calculation, but it's not quite clear to me if that's the case.

The differences in life-expectancy are relatively small. What matters more are the differences in income level. GDP/capita in Norway is more than double that of Spain. So your pension contribution from there will probably be correspondingly larger. There is also big differences in how generous the systems are.
If each country (may be many) sends you the pension to the EU country where you live, what does it matter if you go to live outside EU?

Of course, the more you contribute in country X, the more you'll get from country X. I was thinking more of a skew if your total contribution was the same in all countries. Some countries may be more generous on the distributions.

I also think you can leave US Social Security out. There are totalization agreements between US and any European country. I guess if you have to use it (I think only if you don't qualify for the US SS), computations may become more complicated. Not sure how totalization agreements would apply.

From the link you sent, the proration seems to be done by using a EU-equivalent rate for those countries where you didn't work the minimum years. Look at the Sample Story 2. IT seems for the 10 years in Spain, the Spanish pension system (how much would an all-time Spanish resident would get) doesn't matter. It also seems to assume 30 years is the common prorating period.
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

oslocal wrote: Mon May 10, 2021 5:10 pm Good thread and interesting learning so far.

I am looking at my state pension account in Norway which shows that about 18.1% of my earnings are added to the account each year, with a wage cap of about 720K NOK ($85-90K). (You and your employer still contribute social security taxes on all wages.)

The account represents something like an annuity base, or "PIA"

Your account is indexed each year by the average wage increase in the country
2017 account indexing was 1.14%
2018 account indexing was 3.47%
2019 account indexing was 3.07%
2020 account indexing was 1.50%

Their life expectancy evaluated the year you turn 61 provides for a table of denominators that are used to calculate the annual pension amount.
For example, people born in 1958 have denominators ranging from 19.63 to 9.39 depending on whether when they start taking benefits between age 62 and 75. For people born in 1959, the numbers are 19.77 to 9.51.

So if your pension balance is 3,000,000 (~42 years at 400K per year) and you take benefits from age 62, you will get for example 152,827 each year (1958 issue) or 151,745 (1959 issue)

I don't know if this is better or worse than Social Security. Would it be roughly equal to an AIME of $4000 (48K per year income) which would provide for about 1759 in PIA, which would be about 21,100 each year at FRA?

Interestingly I just found out I have 39 SS credits... :oops:

Assume indexing 0%

To have your pension balance 3000000, you would have to contribute If you contribute $71,428 every year for 42 years, no?

US will allow you to only count the 35 of those years (the highest) (WORSE). And then divide by 35 to start getting pension at 66 (WORSE) . And then you reduce it further by using bending points (roughly 90% for the first $1k, then only %30 or 15%)

It seems to me that for a 40 year working career, you'd be getting more annual income as a retiree than when working. Are you sure you are only being taxed 18.1% (no hidden employer contributions). Or no oil money going into pensions?

With only 39SS credits, I would try to manage a way of working for just 3 months on US, minimum wage and paying black money to your employer. 1 extra credit means lots of $$
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wineandplaya
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by wineandplaya »

I think that's 3,000,000 NOK, not USD. 1 USD = 8.27 NOK currently.
bagle
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by bagle »

international001 wrote: Mon May 10, 2021 7:55 pm There are totalization agreements between US and any European country.
Would invoking a Totalization Agreement mitigate the percentage used in calculating the first WEP bending point (e.g. reduction in PIA factor from 90% to as low as 40%)?
Last edited by bagle on Tue May 11, 2021 4:13 am, edited 1 time in total.
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Hyperborea
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by Hyperborea »

wineandplaya wrote: Sun May 09, 2021 10:36 pm
Hyperborea wrote: Sun May 09, 2021 7:01 pm If you qualify for other pensions earned while not paying into US Social Security then your Social Security payments will be subject to the Windfall Elimination Provision (WEP). That means that your SS could be reduced by as much as 50% of the amount you receive from other such pensions.
My understanding is that WEP basically decreases the benefit for the first $996 of AIME from 90 % to (as low as) 40 %.
Yes, that's exactly what it does. On top of that there is a guarantee that the reduction will be no more than 50% of whatever other pension you receive.

https://www.ssa.gov/pubs/EN-05-10045.pdf
It’s hard to win an argument with a smart person, it's damn near impossible to win an argument with a stupid person. - Bill Murray
oslocal
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by oslocal »

international001 wrote: Mon May 10, 2021 8:25 pmAssume indexing 0%

To have your pension balance 3,000,000, you would have to contribute If you contribute $71,428 every year for 42 years, no?
Yes. In NOK.
Or you could contribute more per year in fewer years.
The point is that every year counts, not just your highest 35 years.
US will allow you to only count the 35 of those years (the highest) (WORSE). And then divide by 35 to start getting pension at 66 (WORSE) . And then you reduce it further by using bending points (roughly 90% for the first $1k, then only %30 or 15%)

It seems to me that for a 40 year working career, you'd be getting more annual income as a retiree than when working. Are you sure you are only being taxed 18.1% (no hidden employer contributions). Or no oil money going into pensions?
Employer pays payroll taxes of which a portion goes to the pension balance. Individuals pay 8.2% social security tax, of which a portion goes to the pension balance. (It also funds sick leave, unemployment, parental leave, etc.)
Individual tax rates are 22% flat tax + 8.2% social security tax on all earnings + a progressive tax on earned income up to 16.2% (above 1 MNOK) for a maximum marginal tax rate of 46.4%.
Interest is taxed at 22%
Dividend and capital gain income is grossed up by 1.44x so effectively taxed at 31.68% (to mimic average effective tax rates on earned income)
With only 39SS credits, I would try to manage a way of working for just 3 months on US, minimum wage and paying black money to your employer. 1 extra credit means lots of $$
Highly likely that will happen. It also appears I may be able to invoke a the totalization agreement without fully understanding how it works. I think It just calculates the PIA based on the earnings record, but the bend points are reduced by a factor of 1/40 to account for missing credits.
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wineandplaya
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by wineandplaya »

Even if 39 credits will allow you to get (somewhat reduced) Social Security by invoking a totalization agreement, it means additional administration. Importantly, less than 40 credits also means that you don't qualify for free Medicare (part A?). Even if my spouse and I plan to retire in Europe, circumstances may make us want to stay in the US for some period of time. For example, to be close to an ailing relative or if our children decide to live there.
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

oslocal wrote: Tue May 11, 2021 4:44 am Yes. In NOK.
Or you could contribute more per year in fewer years.
The point is that every year counts, not just your highest 35 years.
Sorry for the messing up. Still, you would need around 71K NOK a year for 42 years (if indexing was 0.0%)
oslocal wrote: Tue May 11, 2021 4:44 am Employer pays payroll taxes of which a portion goes to the pension balance. Individuals pay 8.2% social security tax, of which a portion goes to the pension balance. (It also funds sick leave, unemployment, parental leave, etc.)
Individual tax rates are 22% flat tax + 8.2% social security tax on all earnings + a progressive tax on earned income up to 16.2% (above 1 MNOK) for a maximum marginal tax rate of 46.4%.
Interest is taxed at 22%
Dividend and capital gain income is grossed up by 1.44x so effectively taxed at 31.68% (to mimic average effective tax rates on earned income)
So I guess the 18.1% was including employer contributions. Still, it seems to me a very good deal, difficult to see how is sustainable.


oslocal wrote: Tue May 11, 2021 4:44 am Highly likely that will happen. It also appears I may be able to invoke a the totalization agreement without fully understanding how it works. I think It just calculates the PIA based on the earnings record, but the bend points are reduced by a factor of 1/40 to account for missing credits.
So you mean 39 US credits would increase your pension in Norway because of the totalization agreement?
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

bagle wrote: Tue May 11, 2021 4:03 am
international001 wrote: Mon May 10, 2021 7:55 pm There are totalization agreements between US and any European country.
Would invoking a Totalization Agreement mitigate the percentage used in calculating the first WEP bending point (e.g. reduction in PIA factor from 90% to as low as 40%)?
I wouldn't think so. Looking at https://www.ssa.gov/international/Agree ... /Spain.pdf, WEP is just an after-calculation.
A Spanish pension may affect your
U.S. benefit
If you qualify for Social Security benefits from
both the United States and Spain and you did
not need the agreement to qualify for the U.S.
benefit, the amount of your U.S. benefit may
be reduced. This is a result of a provision in
U.S. law which can affect the way your benefit
is figured if you also receive a pension based
on work that was not covered by U.S. Social
Security.
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

I'm reading https://www.ssa.gov/international/Agree ... anish.html
If the person does not satisfy the period-of-coverage requirements under Spanish laws, the benefits which he may claim shall be paid according to the following rules:
(...)
The amount of the benefit actually due the person shall be established by reducing the amount determined in subparagraph (c) based on the ratio of the periods of coverage completed under Spanish laws to the total of the periods totalized according to subparagraph (a) (pro rata pension).
So i would seem that Spanish pension may be prorated with US credits if you don't qualify for Spanish Pension. US credits give you less value (because of the bending points). So it would seem to me that it would be good to work many years in US and 14 years in Spain to 'feed up' the Spanish pension.

Am I missing something?
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wineandplaya
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by wineandplaya »

international001 wrote: Tue May 11, 2021 5:22 pm So I guess the 18.1% was including employer contributions. Still, it seems to me a very good deal, difficult to see how is sustainable.
I think that a big caveat is that unlike in the US, earnings above the maximum wage are still taxed at the same rate but don't contribute to your government pension. So wealthy people pay in a lot and don't get much back. Most employees also have a pension from your employer. At least that's the case in Sweden, but I believe Norway is similar.

Anyway, what's more relevant is that the pension systems in Europe are widely divergent. Some are (still) "defined benefit" systems like in the US, whereas others have transitioned into defined contribution systems with progressive elements.
Last edited by wineandplaya on Wed May 12, 2021 4:32 am, edited 1 time in total.
bagle
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by bagle »

international001 wrote: Tue May 11, 2021 5:29 pm
bagle wrote: Tue May 11, 2021 4:03 am
international001 wrote: Mon May 10, 2021 7:55 pm There are totalization agreements between US and any European country.
Would invoking a Totalization Agreement mitigate the percentage used in calculating the first WEP bending point (e.g. reduction in PIA factor from 90% to as low as 40%)?
I wouldn't think so. Looking at https://www.ssa.gov/international/Agree ... /Spain.pdf, WEP is just an after-calculation.
A Spanish pension may affect your
U.S. benefit
If you qualify for Social Security benefits from
both the United States and Spain and you did
not need the agreement to qualify for the U.S.
benefit, the amount of your U.S. benefit may
be reduced. This is a result of a provision in
U.S. law which can affect the way your benefit
is figured if you also receive a pension based
on work that was not covered by U.S. Social
Security.
I've now researched this question a bit further, and I think that the US Social Security benefit may be higher if one does invoke a totalization agreement: "The WEP does not apply to...workers who receive foreign pension payments after 1994 that are based on a totalization agreement with the United States" (source: https://fas.org/sgp/crs/misc/98-35.pdf).

If I'm right (please correct me if not!), I guess the next question is whether this higher initial US benefit calculation is more than offset by the reduction in credits in each country in order to reach the minimum in each.
Stork
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by Stork »

wineandplaya wrote: Mon May 10, 2021 11:13 am
international001 wrote: Mon May 10, 2021 10:27 am Interesting. So it seems for EU pensions, there are not totalization agreements between countries, just a global agreement between all EU members.
For countries were you worked only a little time, it seems you use a EU-equivalent rate. So you may be better off if you worked where pensions were more generous (respect to what you contributed, imagine a country with low expectancy life-)
My understanding is that you calculate the pension for each country separately, in a prorated way, and then all the payouts are administered by the country of residence. Or, if you no longer live in the EU, in your last country of residence. My guess is that you leave any US Social Security out completely in that calculation, but it's not quite clear to me if that's the case.

The differences in life-expectancy are relatively small. What matters more are the differences in income level. GDP/capita in Norway is more than double that of Spain. So your pension contribution from there will probably be correspondingly larger. There is also big differences in how generous the systems are.
There are more differences than that. Some countries (DK and UK (I know it is no longer EU)) have quite low state pensions, but many have private pensions (which may be from employment) on top. Generally, the latin countries have a public pension linked to your years of contribution and you salary the last years for working, with a very low minimum just about everyone gets.

My wife and I will between us qualify for contributions from UK, DK, PT and CH; guessing what that will be in 15-20 years time is interesting. The answer is likely "not enough to live on, but better than a kick in the teeth".
bagle
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by bagle »

bagle wrote: Wed May 12, 2021 2:45 am
international001 wrote: Tue May 11, 2021 5:29 pm
bagle wrote: Tue May 11, 2021 4:03 am
international001 wrote: Mon May 10, 2021 7:55 pm There are totalization agreements between US and any European country.
Would invoking a Totalization Agreement mitigate the percentage used in calculating the first WEP bending point (e.g. reduction in PIA factor from 90% to as low as 40%)?
I wouldn't think so. Looking at https://www.ssa.gov/international/Agree ... /Spain.pdf, WEP is just an after-calculation.
A Spanish pension may affect your
U.S. benefit
If you qualify for Social Security benefits from
both the United States and Spain and you did
not need the agreement to qualify for the U.S.
benefit, the amount of your U.S. benefit may
be reduced. This is a result of a provision in
U.S. law which can affect the way your benefit
is figured if you also receive a pension based
on work that was not covered by U.S. Social
Security.
I've now researched this question a bit further, and I think that the US Social Security benefit may be higher if one does invoke a totalization agreement: "The WEP does not apply to...workers who receive foreign pension payments after 1994 that are based on a totalization agreement with the United States" (source: https://fas.org/sgp/crs/misc/98-35.pdf).

If I'm right (please correct me if not!), I guess the next question is whether this higher initial US benefit calculation is more than offset by the pro rata reduction in credits in each country in order to reach the minimum in each.
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

wineandplaya wrote: Tue May 11, 2021 6:16 pm
international001 wrote: Tue May 11, 2021 5:22 pm So I guess the 18.1% was including employer contributions. Still, it seems to me a very good deal, difficult to see how is sustainable.
I think that a big caveat is that unlike in the US, earnings above the maximum wage are still taxed at the same rate but don't contribute to your government pension. So wealthy people pay in a lot and don't get much back. Most employees also have a pension from your employer. At least that's the case in Sweden, but I believe Norway is similar.

Anyway, what's more relevant is that the pension systems in Europe are widely divergent. Some are (still) "defined benefit" systems like in the US, whereas others have transitioned into defined contribution systems with progressive elements.
Good point. That could be a reason. But I wouldn't think salaries can be that high. Most of richest people get income via investment/business.
Norway

That's why I mentioned https://en.wikipedia.org/wiki/Governmen ... _of_Norway
With a population of 5.2 million people, the fund was worth $192,307 per Norwegian citizen. Of the assets, 65% were equities (accounting for 1.3% of global equity markets), and the rest were property and fixed-income investments. Norway can withdraw up to 3% of the fund's value each year
Yes.. different pensions systems could lead to game the system by choosing how much to work on each country. But I guess most people don't base their working country decisions on that, so it's a non issue. If it was the same across different states in US, it would be a different story.
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

bagle wrote: Wed May 12, 2021 10:46 am

I've now researched this question a bit further, and I think that the US Social Security benefit may be higher if one does invoke a totalization agreement: "The WEP does not apply to...workers who receive foreign pension payments after 1994 that are based on a totalization agreement with the United States" (source: https://fas.org/sgp/crs/misc/98-35.pdf).

If I'm right (please correct me if not!), I guess the next question is whether this higher initial US benefit calculation is more than offset by the pro rata reduction in credits in each country in order to reach the minimum in each.
So invoking a totalization agreement between US and another country means that you either receive the pension from US or the other country, but not both?

If so, on what non-covered pension would the WEP apply? A pension in a third country?
bagle
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by bagle »

international001 wrote: Wed May 12, 2021 7:33 pm
bagle wrote: Wed May 12, 2021 10:46 am

I've now researched this question a bit further, and I think that the US Social Security benefit may be higher if one does invoke a totalization agreement: "The WEP does not apply to...workers who receive foreign pension payments after 1994 that are based on a totalization agreement with the United States" (source: https://fas.org/sgp/crs/misc/98-35.pdf).

If I'm right (please correct me if not!), I guess the next question is whether this higher initial US benefit calculation is more than offset by the pro rata reduction in credits in each country in order to reach the minimum in each.
So invoking a totalization agreement between US and another country means that you either receive the pension from US or the other country, but not both?

If so, on what non-covered pension would the WEP apply? A pension in a third country?
IF I'm interpreting this correctly, invoking a totalization agreement between the US and another country (e.g. EU) means you would receive a pension from both countries, provided you meet minimum elegibility requirements in each country:

"If you don’t meet the basic requirements, the agreement may help you qualify for a benefit as explained below.

Benefits from the U.S—If you don’t have enough work credits under the U.S. system to qualify for regular benefits, you may be able to qualify for a partial benefit from the United States based on both U.S. and Spanish credits. However, to be eligible to have your Spanish credits counted, you must have earned at least six credits (generally one and one-half years of work) under the U.S. system. If you already have enough credits under the U.S. system to qualify for a benefit, the United States cannot count your Spanish credits.

Benefits from Spain—Social Security credits from both countries can also be counted, when necessary, to meet the eligibility requirements for Spanish benefits. To be eligible to have your U.S. and Spanish credits counted, you must have at least one year of coverage credited under the Spanish system." (source: https://www.ssa.gov/international/Agree ... spain.html).

So, if you don't have enough credits in either country, then invoking the relevant totalization agreement seems sensible:
  • You can reduce the WEP
  • And you are eligible for a pension in another country (though there may be a pro rata adjustment)
What if you do have enough credits to qualify in both (or more) countries? The best strategy again seems to be to invoke the totalization agreement. Why?
  • Because it allows you to reduce the WEP
  • And yet there is no pro rata reduction in the number of credits in either country. That would only apply if you needed to add both country's credits:

    "Computation of U.S. Benefit Under The Agreement

    When a U.S. benefit becomes payable as a result of counting both U.S. and Spanish Social Security credits, an initial benefit is determined based on your U.S. earnings as if your entire career had been completed under the U.S. system. This initial benefit is then reduced to reflect the fact that Spanish credits helped to make the benefit payable." (source: ibid)

    Perhaps that is too good to be true??
oslocal
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by oslocal »

bagle wrote: Thu May 13, 2021 1:04 pm What if you do have enough credits to qualify in both (or more) countries? The best strategy again seems to be to invoke the totalization agreement. Why?
  • Because it allows you to reduce the WEP
  • And yet there is no pro rata reduction in the number of credits in either country. That would only apply if you needed to add both country's credits:

    "Computation of U.S. Benefit Under The Agreement

    When a U.S. benefit becomes payable as a result of counting both U.S. and Spanish Social Security credits, an initial benefit is determined based on your U.S. earnings as if your entire career had been completed under the U.S. system. This initial benefit is then reduced to reflect the fact that Spanish credits helped to make the benefit payable." (source: ibid)

    Perhaps that is too good to be true??
I think that if you qualify for SS based on US earnings record alone, then you cannot invoke the totalization agreement.
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

oslocal wrote: Thu May 13, 2021 2:30 pm I think that if you qualify for SS based on US earnings record alone, then you cannot invoke the totalization agreement.
That's what I understand as well:

https://www.ssa.gov/international/Agree ... spain.html
An agreement effective April 1, 1988, between the United States and Spain improves Social Security protection for people who work or have worked in both countries. It helps many people who, without the agreement, would not be eligible for monthly retirement, disability or survivors benefits under the Social Security system of one or both countries. It also helps people who would otherwise have to pay Social Security taxes to both countries on the same earnings.

So I don't understand how WEP comes into play
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

bagle wrote: Thu May 13, 2021 1:04 pm

Benefits from the U.S—If you don’t have enough work credits under the U.S. system to qualify for regular benefits, you may be able to qualify for a partial benefit from the United States based on both U.S. and Spanish credits. However, to be eligible to have your Spanish credits counted, you must have earned at least six credits (generally one and one-half years of work) under the U.S. system. If you already have enough credits under the U.S. system to qualify for a benefit, the United States cannot count your Spanish credits.

Benefits from Spain—Social Security credits from both countries can also be counted, when necessary, to meet the eligibility requirements for Spanish benefits. To be eligible to have your U.S. and Spanish credits counted, you must have at least one year of coverage credited under the Spanish system." (source: https://www.ssa.gov/international/Agree ... spain.html).
I am not sure I understand that part. To get US SS you need 40 credits (10 years of work). To get Spanish SS you need 15 years of work (60 credits)

- You have 30 credits in US, 40 credits in Spain. Does both Spain and US compute your SS independently, and then US pays 3/7 of its computation, and Spain pays 4/7 of its own computation?

- You have six credits in US. You also have 34 credits in Spain. You can claim SS from US and get 6/40 of its computation, but no SS in Spain?

- You have 59 credits in US. You also have 1 credit in Spain. You can claim SS from US and get 59/60 of it, but no SS in Spain?


But to compute your actual SS benefit, you need more than credits. You need the contribution amount, no?
bagle
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by bagle »

international001 wrote: Thu May 13, 2021 7:43 pm
bagle wrote: Thu May 13, 2021 1:04 pm

Benefits from the U.S—If you don’t have enough work credits under the U.S. system to qualify for regular benefits, you may be able to qualify for a partial benefit from the United States based on both U.S. and Spanish credits. However, to be eligible to have your Spanish credits counted, you must have earned at least six credits (generally one and one-half years of work) under the U.S. system. If you already have enough credits under the U.S. system to qualify for a benefit, the United States cannot count your Spanish credits.

Benefits from Spain—Social Security credits from both countries can also be counted, when necessary, to meet the eligibility requirements for Spanish benefits. To be eligible to have your U.S. and Spanish credits counted, you must have at least one year of coverage credited under the Spanish system." (source: https://www.ssa.gov/international/Agree ... spain.html).
I am not sure I understand that part. To get US SS you need 40 credits (10 years of work). To get Spanish SS you need 15 years of work (60 credits)

- You have 30 credits in US, 40 credits in Spain. Does both Spain and US compute your SS independently, and then US pays 3/7 of its computation, and Spain pays 4/7 of its own computation?

- You have six credits in US. You also have 34 credits in Spain. You can claim SS from US and get 6/40 of its computation, but no SS in Spain?

- You have 59 credits in US. You also have 1 credit in Spain. You can claim SS from US and get 59/60 of it, but no SS in Spain?
I would also like to see some practical examples. The US Social Security Administration seems to be saying 'contact us or our EU equivalent for details for your specific case':

"This table is only a general guide. You can get more specific information about U.S. benefits here on our web site or at any U.S. Social Security office. You can get more detailed information about the Spanish system by writing to the Spanish address in "For More Information" or by visiting the Spanish Social Security system’s web site at www.seg-social.es." (source: https://www.ssa.gov/international/Agree ... ml#monthly)

I haven't been able to find any more specific info on the SS website.
international001 wrote: Thu May 13, 2021 7:43 pm But to compute your actual SS benefit, you need more than credits. You need the contribution amount, no?
Yes, presumably. I think you need to contact SS in either (or both?) countries, and they will compile contributions:

"You don’t have to do anything to have your credits in one country counted by the other country. If we need to count your credits under the Spanish system to help you qualify for a U.S. benefit, we will get a copy of your Spanish record directly from Spain when you apply for benefits. If Spain needs to count your U.S. credits to help you qualify for a Spanish benefit, they will get a copy of your U.S. record directly from the Social Security Administration when you apply for the Spanish benefit." (source: ibid)
Topic Author
wineandplaya
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by wineandplaya »

It seems pretty clear that the WEP does apply if you have a pension from abroad. You'll find details about in multiple webpages, such as https://thunfinancial.com/home/american ... nt-abroad/ or https://www.taylortaylorusa.com/blog-01 ... vision-wep. An interesting detail appears to be that the amount of the reduction appears to depend on exchange rates when you first apply for benefits and isn't updated.
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

wineandplaya wrote: Fri May 14, 2021 1:11 pm It seems pretty clear that the WEP does apply if you have a pension from abroad. You'll find details about in multiple webpages, such as https://thunfinancial.com/home/american ... nt-abroad/ or https://www.taylortaylorusa.com/blog-01 ... vision-wep. An interesting detail appears to be that the amount of the reduction appears to depend on exchange rates when you first apply for benefits and isn't updated.
What do you mean 'pension from abroad' ?

Let's say you worked a bit in US and a bit in Spain, and you didn't have enough credits for either (let's assume 9 years (36 credits) in both US and Spain). Then you can invoke the totalization treaty and you'll get a portion of your pension in Spain and a portion in US. Isn't that how it works? In that case, WEP wouldn't apply.
If you qualify for Social Security benefits from both the United States and Spain and you didn’t need the agreement to qualify for either benefit, the amount of your U.S. benefit may be reduced. This is a result of a provision in U.S. law which can affect the way your benefit is figured if you also receive a pension based on work that was not covered by U.S. Social Security. For more information, get the publication, Windfall Elimination Provision.
Let me assume you have a choice of invoking totalization agreement or not (let's assume 15 years (60 credits) in both US and Spain). For the US side, it would make more sense not to invoke it. SInce US distributions are progressive, you'll end up with a lower pension if you do.
Topic Author
wineandplaya
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by wineandplaya »

international001 wrote: Fri May 14, 2021 5:37 pm
wineandplaya wrote: Fri May 14, 2021 1:11 pm It seems pretty clear that the WEP does apply if you have a pension from abroad. You'll find details about in multiple webpages, such as https://thunfinancial.com/home/american ... nt-abroad/ or https://www.taylortaylorusa.com/blog-01 ... vision-wep. An interesting detail appears to be that the amount of the reduction appears to depend on exchange rates when you first apply for benefits and isn't updated.
What do you mean 'pension from abroad' ?

Let's say you worked a bit in US and a bit in Spain, and you didn't have enough credits for either (let's assume 9 years (36 credits) in both US and Spain). Then you can invoke the totalization treaty and you'll get a portion of your pension in Spain and a portion in US. Isn't that how it works? In that case, WEP wouldn't apply.
If you qualify for Social Security benefits from both the United States and Spain and you didn’t need the agreement to qualify for either benefit, the amount of your U.S. benefit may be reduced. This is a result of a provision in U.S. law which can affect the way your benefit is figured if you also receive a pension based on work that was not covered by U.S. Social Security. For more information, get the publication, Windfall Elimination Provision.
Let me assume you have a choice of invoking totalization agreement or not (let's assume 15 years (60 credits) in both US and Spain). For the US side, it would make more sense not to invoke it. SInce US distributions are progressive, you'll end up with a lower pension if you do.
It doesn't seem like you have the choice whether to invoke the treaty if you have at least 40 credits in the US:
If you have Social Security credits in both the
United States and Spain, you may be eligible
for benefits from one or both countries. If you
meet all the basic requirements under one
country’s system, you will get a regular benefit
from that country.
If you do not meet the basic
requirements, the agreement may help you
qualify for a benefit as explained below.
If I understand the calculation for partial benefit right, you first calculate a primary amount based on how much you'd get if you had worked your whole career in the US and then this amount gets prorated (proportionally?) based on how long you actually worked in the US. Let's say you spent 1/2 of your career in the US and 1/2 in Spain. Do you then get 1/2 of your US Social Security benefit? That would be worse of a hit than WEP which in the worst case also comes with a 50 % reduction, but only of the first 1000 USD/month. So in order to come out ahead with the totalization agreement, you need to have worked significantly shorter in Spain, but then you're unlikely to have much pension from there to be used in the WEP calculation. I don't see how the totalization agreement (and thus a prorated pension) can give a better deal than just accepting the WEP.
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

If you worked 1/2 in US and 1/2 in Spain, wouldn't have Spain have to give you some pension and US give you some pension?
And this prorating is based only on the time you worked or on how much you contributed on each country?

Also, if you worked 10 years in US and 10 years in Spain, you qualify for pension in US but not in Spain. I would think you get the pension in US without consideration of Spain, and in Spain you would get a pension by doing some prorating with US.

Because US pension is progressive, you are better of w/o totalization agreement, before you start using WEP. But once you compute WEP, I'm not sure. You'd have to do actual numbers.
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wineandplaya
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by wineandplaya »

international001 wrote: Sat May 15, 2021 6:06 pm If you worked 1/2 in US and 1/2 in Spain, wouldn't have Spain have to give you some pension and US give you some pension?
And this prorating is based only on the time you worked or on how much you contributed on each country?

Also, if you worked 10 years in US and 10 years in Spain, you qualify for pension in US but not in Spain. I would think you get the pension in US without consideration of Spain, and in Spain you would get a pension by doing some prorating with US.

Because US pension is progressive, you are better of w/o totalization agreement, before you start using WEP. But once you compute WEP, I'm not sure. You'd have to do actual numbers.
The pension from Spain and from the US are separate. They are never combined, you just use the credits from one country to allow you qualify for benefits even if you don't have the required number of years worked. So if you have worked 10 years in Spain and 10 years in the US, you will need to use the totalization agreement to get a benefit in Spain, but not in the US, where you will qualify anyway. The Spanish benefit will decrease your US benefit somewhat due to the WEP (but not that much since you will only earn so much pension from working 10 years in Spain).

In terms of numbers, let's say that your Social Security wage in the US was $142k (the maximum for social security). Forgetting about indexing (since the maximum is changing with it anyway), your average monthly earnings (AIME), will be around $142k * 10 / 35 / 12 = $3381. The average is taken over 35 years. In the worst case (with a significant Spanish pension), that would result in a Social Security monthly benefit of around 0.40 * ($996) + 0.32 * ($3381 - $996) = $1162, or about $14k/yr. Without WEP, you would have gotten 0.90 * ($996) + 0.32 * ($3381 - $996) = $19.9k/yr. That's basically the upper and lower bounds on your benefit taken at regular retirement age.

Now let's consider what happens if you invoke the totalization agreement, say due to only 9 years of work in the US. The formula appears to be described here: https://www.ssa.gov/policy/docs/ssb/v78n4/v78n4p1.html

You have to first calculate a theoretical AIME based on if you had spent your whole career in the US with the same relative earning position. If you had spent your whole career in the US earning the the Social Security wage maximum, your AIME would be be around $142k / 12 = $11,800. That would result in a benefit of 0.90 * ($996) + 0.32 * ($6002 - $996) + 0.15 * ($11800 - $6002) = $3368/mo. This amount then gets prorated by the the factor 9/35 giving $866/mo, or $10.4k per year.

So if you have already worked 9 years in the US, you'll increase your Security benefit by somewhere between 35 % (maximum WEP: $14k/yr as described above) and 91 % (minimal WEP: $19.9k/yr as described above). So at least with this example, it's definitely worth it to try to get to the full 40 quarters in the US. Prorating, at least if you're earning close to the Social Security maximum wage, will hit you much harder than the WEP.

These numbers above don't take indexing of wages into account, but I don't think that will change anything fundamentally. SSA appears to have an example similar to the one above on their webpage, that includes indexing, and the number above doesn't seem to be completely off ($586.65/mo for 8 years at the maximum wage, and for retirement in 2017 instead of 2021): https://www.ssa.gov/policy/docs/ssb/v78 ... .html#appB

Secondly, you get a pretty good return-on-investment if you delay your Social Security as much as possible, to age 70, so you can get a bigger benefit that way. But it shouldn't change anything above, since all numbers are then just scaled by the same factor.
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

Thanks for the examples. So it looks even with WEP, you'll be better off getting US pension w/o invoking totalization agreement.
Even if it would be against your benifit, do you know if invoking the totalization agreement is optional?

IT looks also that the prorating is based on the total credits (i.e. amount of time worked), not the contributions made. You make some theoretical benefits for a given country assuming you made the average contributions of that country for your whole career, and then you prorate. What I guess is a good system and neutral for the most part, but it can produce some interesting computations. Working in Spain for a lower salary, may decrease your US pension (it's theoretical benefit won't increase much because it's progressive, but you will decrease it after the proratio) and not increase much your Spanish pension.

Delaying US SS takes out some of its progressiveness, so it typically works in your favor if your do so.
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wineandplaya
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by wineandplaya »

international001 wrote: Sun May 16, 2021 7:01 pm Thanks for the examples. So it looks even with WEP, you'll be better off getting US pension w/o invoking totalization agreement.
Even if it would be against your benifit, do you know if invoking the totalization agreement is optional?
At least for the US-Spain totalization agreement, it's pretty clear that it's not optional.
If you meet all the basic requirements under one country’s system, you will get a regular benefit from that country. If you do not meet the basic
requirements, the agreement may help you qualify for a benefit as explained below.
https://www.ssa.gov/international/Agree ... /Spain.pdf

international001 wrote: Sun May 16, 2021 7:01 pm IT looks also that the prorating is based on the total credits (i.e. amount of time worked), not the contributions made. You make some theoretical benefits for a given country assuming you made the average contributions of that country for your whole career, and then you prorate. What I guess is a good system and neutral for the most part, but it can produce some interesting computations. Working in Spain for a lower salary, may decrease your US pension (it's theoretical benefit won't increase much because it's progressive, but you will decrease it after the proratio) and not increase much your Spanish pension.
No, I don't think that's correct. If you have to use the totalization agreement, your US benefit will be independent on how much you get from Spain since there is no WEP. The US benefit is prorated based on a theoretical 35 year career, irrespective of the how long you worked in Spain or in other countries. At least that's my understanding from the example I referenced.

If you have 40 credits in the US, your US benefit will indeed decrease due to your Spanish earnings, but your total benefit (US + Spain) will always increase, since WEP is limited to at most 50 % of your foreign earnings (for 20 years or less of Social Security earnings). Conceptually, you can think of WEP as an additional 50 % tax on your foreign benefit until your foreign benefit reaches around $1000/mo.

From what I can tell, the progressive elements of European pensions are different from US Social Security. Instead of awarding you a generous percentage (90 %) of your average income up to a threshold, they instead tend to give all residents a guaranteed minimum pension, which may depend on how many years you've lived in the country. At least that's the case for Sweden, Norway and Spain. So prorating may not matter much for European pensions, except for in that they get rid of minimum years of service requirement.

Another thing to consider, there is also a work pension set aside by employers in Europe that is awarded on top of your state pension, similar to a US 401(k), with some freedom to allocate in e.g. an index fund of your choice. At least in Sweden and Norway, this type of contribution is mandated or de-facto mandated (by union agreements). I'm not sure if this element of the European pension also need to be included in your WEP, although it might not matter for most people, since the WEP maxes out at a $1000-ish per month foreign benefit anyway.
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

wineandplaya wrote: Mon May 17, 2021 1:43 pm [
international001 wrote: Sun May 16, 2021 7:01 pm IT looks also that the prorating is based on the total credits (i.e. amount of time worked), not the contributions made. You make some theoretical benefits for a given country assuming you made the average contributions of that country for your whole career, and then you prorate. What I guess is a good system and neutral for the most part, but it can produce some interesting computations. Working in Spain for a lower salary, may decrease your US pension (it's theoretical benefit won't increase much because it's progressive, but you will decrease it after the proratio) and not increase much your Spanish pension.
No, I don't think that's correct. If you have to use the totalization agreement, your US benefit will be independent on how much you get from Spain since there is no WEP. The US benefit is prorated based on a theoretical 35 year career, irrespective of the how long you worked in Spain or in other countries. At least that's my understanding from the example I referenced.
Where does it say so? If you work 9 years in US and 6 in Spain, you don't use 35 years, but only 15. That's what 'totalization' means, no?

https://www.ssa.gov/international/Agree ... anish.html
The periods of coverage completed under each of the laws of the two Contracting States, as well as the periods recognized as equivalent, shall be totalized, provided they do not coincide, both for the determination of the right to benefits as well as for the maintenance or recovery of this right.
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wineandplaya
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by wineandplaya »

international001 wrote: Wed May 19, 2021 8:39 pm Where does it say so? If you work 9 years in US and 6 in Spain, you don't use 35 years, but only 15. That's what 'totalization' means, no?
I was concluding that from the calculation example from SSA:

https://www.ssa.gov/policy/docs/ssb/v78 ... .html#appB

It only mentions that there are at least 6 credits from Switzerland and then proceeds to construct a theoretical earnings record based on a 40 year career in the US maintaining the same relative earning position. The 35 best years from the 40 are then selected, just as in the standard Social Security benefit calculation.
bagle
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by bagle »

You can estimate your WEP and US benefit using the IRS calculator here. By increasing the EU (non-covered) pension amount, you can see the reduction in US benefit.

https://www.ssa.gov/benefits/retirement ... pjs04.html
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

wineandplaya wrote: Thu May 20, 2021 4:03 am
international001 wrote: Wed May 19, 2021 8:39 pm Where does it say so? If you work 9 years in US and 6 in Spain, you don't use 35 years, but only 15. That's what 'totalization' means, no?
I was concluding that from the calculation example from SSA:

https://www.ssa.gov/policy/docs/ssb/v78 ... .html#appB

It only mentions that there are at least 6 credits from Switzerland and then proceeds to construct a theoretical earnings record based on a 40 year career in the US maintaining the same relative earning position. The 35 best years from the 40 are then selected, just as in the standard Social Security benefit calculation.
Thanks for the example. There are things I still don't understand (why it's assuming ages 22-61, for instance, and what would happen if worked in US before or after that)

But wow! you are right and it's using computation over 35 years, regardless of the total amount of credits earned
It's interesting also because it seems to say that if you have 8 QC in US and 8 QC in Spain , you would get some money from US (even if you don't add up 40 QC)

Because of the progressivity of SS, it's a bad deal. If instead of working 9 years in US you work 10, it will be a very positive improvement for you, as you mentioned.

This is described in that document above
Prorated PIA = Theoretical PIA × (QCs earned) / (QCs equal to an entire career)
For Spain, however, it seems the prorating uses the actual total QCs
Prorated benefit = Theoretical benefit × (Coverage earned under the partner country's laws) / (Coverage earned in both countries)
I guess for Spain it doesn't matter much, because the distributions are more or less flat to your contributions (not progressive like in US).

But Spain has a minimum pension and a maximum pension. I'm not sure if those would be included under 'Coverage earned under the partner country's laws' (i.e. before the prorating).
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

wineandplaya wrote: Mon May 17, 2021 1:43 pm Another thing to consider, there is also a work pension set aside by employers in Europe that is awarded on top of your state pension, similar to a US 401(k), with some freedom to allocate in e.g. an index fund of your choice. At least in Sweden and Norway, this type of contribution is mandated or de-facto mandated (by union agreements). I'm not sure if this element of the European pension also need to be included in your WEP, although it might not matter for most people, since the WEP maxes out at a $1000-ish per month foreign benefit anyway.
Then you would have to consider perhaps any foreign private pension plan, no?

According to this reference, it would apply

https://www.greenbacktaxservices.com/bl ... -benefits/
One of the provisions is the reduction of the US Social Security Benefit if receiving foreign social security payments or private pension payments. Generally speaking, the US benefit is reduced by $50 for every $100 of the foreign pension. This is very general and the actual reduction depends on the amount of wages and time spent working while not participating in the system.
But I would look further into it if it had to apply, because it's likely to be a gray area.
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by wineandplaya »

I tried to make a quick back-of-the-envelope calculation of Spanish benefits for a "Barista FIRE" in Spain for my own case. Scenario is that we move to Spain at age 50 and I continue my current self-employment (via a Spanish Sociedad Limitada, essentially equivalent to a US LLC with S Corp taxation) at low-ish intensity for 15 years until I'm 65. Working for 15 years (the minimum) entitles you to 50 % of your contribution base without needing to invoke any totalization agreement.

I you are self-employed in Spain, you can elect how much you want to pay into Spanish social security, between a minimum and a maximum, although my understanding is that this might change in the future, linking the Social security wage to your actual income. Anyway for 2021, for a maximum Spanish social security wage base "base de cotización" of 4,070.10 EUR/mo (48.8k EUR/yr), for 15 years, you will get 50 % of that as pension, i.e. 24.4k EUR/yr. With current exchange rate of roughly 1.2 USD = 1 EUR, that's 29k USD/yr. For a minimum Spanish social security wage base of 1,214.10 EUR/mo (14.6k EUR/yr), you'd get 7.3k EUR/yr or 8.7k USD/yr.

My guess is that you probably want to stay as close to the minimum as possible since the return-on-investment on Social Security taxes isn't great, even without WEP coming into play. Especially since you'll pay (progressive) general income tax on it at withdrawal. The WEP provision in US Social Security maxes out at around 12k USD/yr in foreign pension, so it's easy reach that amount even with limited foreign earnings. If you are getting close to maxing out on WEP no matter what, electing a larger wage base might be a reasonable way to get access to a "longevity insurance" indexed with inflation.

Numbers from here: https://www.infoautonomos.com/seguridad ... o-se-paga/
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

I thought you wanted it to go beyond those 12k to make it worth. The first 12k is like only making half because of WEP. IS it really worth to plan for lower than that?

I think Spanish SS is difficult to calculate, but they crop it a the max (currently 2.7k E /month = 32.4k E). So it wouldn't seem working more than 20 years with max contribution. I see in your computations you assume that for 15 years, you get 50% of your contribution base (annually).

Things to keep in mind is that the age at which you may get your Spanish pension is likely to increase. And laws likely to change. You can plan it so if you have to contribute more, do it at the end of your time working in Spain. SS in all countries are biased so returns are higher for your last contributions. If I could, I would contribute to SS a lump sump the year before retirement.
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wineandplaya
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by wineandplaya »

Ok, let's assume that you know that you'll hit the WEP maximum no matter what. Then for an additional 100 EUR contribution base, you'll pay 30.60 EUR in Spanish social security contribution. If you work for 15 years, the average base will increase by 100/15 EUR. You'll get 50 % of that as an annuity, so 0.5*100/15=3.33 EUR/ year.

So your 30.60 EUR contribution bought you a 3.33 EUR/year annuity starting on average 7.5 years in the future. That actually sounds like a pretty good deal, over 10 % and indexed by inflation in the place you live.
Last edited by wineandplaya on Thu May 27, 2021 9:31 am, edited 2 times in total.
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wineandplaya
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by wineandplaya »

As a corollary, in the case of Spain: If you were to get $20k/yr US Social Security (10 years at the Social Security max wage, delayed until you turn 70 and then hit with maximum WEP) and then make the maximum contribution to Spanish Social Security for 15 years, you're at a combined benefit of 41k EUR/yr. That's in the 37 % tax bracket and more than that in some regions. All of this is back-of-the-envelope of course.

You should think very carefully about how much you want to put into US tax-deferred accounts such as 401(k) before expatriation, since all of your withdrawals after you starting taking US Social Security and EU pension will be taxed at 37 % or higher compared to a much lower capital gains rate for earnings in a taxable account. Cf. viewtopic.php?f=25&t=346789.
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

wineandplaya wrote: Thu May 27, 2021 6:18 am Ok, let's assume that you know that you'll hit the WEP maximum no matter what. Then for an additional 100 EUR contribution base, you'll pay 30.60 EUR in Spanish social security contribution. If you work for 15 years, the average base will increase by 100/15 EUR. You'll get 50 % of that as an annuity, so 0.5*100/15=3.33 EUR/ year.

So your 30.60 EUR contribution bought you a 3.33 EUR/year annuity starting on average 7.5 years in the future. That actually sounds like a pretty good deal, over 10 % and indexed by inflation in the place you live.
If you consider you have also maxed your WEP because some other pension (like one in Sweeden) yes. But because of WEP, the actual number will move between 5% and 10%. Not bad, but depending on the specifics, you may be better off in you invest in an annuity.

Note: it would also be good if you just get the last 10 years of your life working
international001
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Re: FIRE in Europe: Qualifying for both US Social Security and EU state pension(s) and how to estimate benefits?

Post by international001 »

wineandplaya wrote: Thu May 27, 2021 8:58 am As a corollary, in the case of Spain: If you were to get $20k/yr US Social Security (10 years at the Social Security max wage, delayed until you turn 70 and then hit with maximum WEP) and then make the maximum contribution to Spanish Social Security for 15 years, you're at a combined benefit of 41k EUR/yr. That's in the 37 % tax bracket and more than that in some regions. All of this is back-of-the-envelope of course.

You should think very carefully about how much you want to put into US tax-deferred accounts such as 401(k) before expatriation, since all of your withdrawals after you starting taking US Social Security and EU pension will be taxed at 37 % or higher compared to a much lower capital gains rate for earnings in a taxable account. Cf. viewtopic.php?f=25&t=346789.
I think everything comes back to the same. Plan to have some taxable for the early-in-time distributions. And pre-tax/Roth for the late-in-time distributions. But given the differences in sequence of returns, the uncertainty becomes high. So plan for worse case scenarios. Like 2 decades with bad returns first or later in life
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