Social Security Totalization Agreements

1. Social Security Totalization Agreements Their Purpose and the Pending Agreement with Mexico Greg Cordell Ryan Hubscher

2. Social Security Problems for International Laborers Dual Taxation Gaps in Benefit Protection Disincentives for International Commerce

3. Current and Prospective Agreement Nations

4. Dual Taxation Nations collect social security tax for all work performed within their borders Many nations cover (and tax) expatriates Some nation’s tax laws treat social security contributions as a benefit to the employee This increases the employee’s income tax Tax equalized salaries

5. Tax Equalization Example Income: $100,000 Foreign SS tax: 30% Employer $10,000 Employee $20,000 Marginal income tax: 60% Extra income tax: $12,000 + $7,200 + … = $30,000 Total tax: $60,000

6. Will international workers qualify for benefits? Years of contributions Residency To qualify for benefits in some nations, a retiree must have worked a minimum amount of time during a few years immediately preceding retirement

7. Eliminated Dual Coverage • Territorial Rule • A worker will be covered and pay taxes to the nation where they work • Detached-Worker Rule • Exception to the territorial rule • The worker will be covered by their home nation only • For temporary work (5 years or less) • The worker must be employed in the foreign nation by the same employer that sent them to the foreign nation

8. Determining Eligibility The US requires 40 credits (quarters) of coverage A worker with at least 6 US credits can count credits earned in an agreement nation Agreement nations will honor US credits in a similar fashion

9. Totalizing Benefits If a worker earned 40 credits (10 years) in the US, their US benefit will be determined using the standard method If a worker used foreign credits to qualify for US benefits, their benefit will be calculated as if their entire career was in the US This benefit will be reduced depending on how many credits were actually earned in the US The agreement nations will calculate benefits in a similar way

10. Example: Retiring in Portugal • Portugal requires 180 months (15 years) of coverage to qualify for benefits • Portugal requires 12 months of coverage before honoring US credits • A worker was covered for • 20 quarters (5 years) in the US • 144 months (12 years) in Portugal • The worker will receive a partial benefit from both nations

11. International Commerce • Dual social security taxation acts as an implicit tariff on labor trade • Labor tariff consequences: • Tariff revenue for the protectionist nation • Protection of domestic labors from foreign competition • Less opportunity for US laborers working abroad • Less international business • Deadweight loss

12. Totalization Agreement With Mexico • Agreement between Mexico and United States likely in the same vein as other totalization agreements • Text of agreement not publicly available • Allows for a healthy amount of debate

13. Details of Proposed Agreement • Mexican Citizen in United States • May receive prorated benefits after only 6 quarters of working in United States • Possible qualification loophole • Must be working in United States legally • Pay social security only to United States • Unless temporary only (<5 years) • Allowed to totalize benefit between the two countries

14. Details of Proposed Agreement • United States Citizen in Mexico • Pay social security only to Mexico • Unless temporary residence only (<5 years) • Period of time needed to receive partial benefit unknown • Allowed to totalize benefit between the two countries • Must be working in Mexico legally

15. Estimated Costs of Agreement • Cost United States roughly $525 million over 5 years • 50,000 Mexicans becoming eligible • Estimated cost per year in 2050 is $650 million • Savings for United States employers and employees roughly $140 million over 5 years • SSA doesn’t believe the agreement will have a significant effect on the social security trust

16. Criticism of the Agreement • Process for creating agreements is unclear • No standard process • Lack of transparency • Lack of due diligence • Little investigation into Mexican social security program • No substantive tests of claims

17. Anti-Immigration Concerns • Could allow Mexican workers to receive benefits for work earned while here illegally • Benefits from social security more easily sent across borders • Possible incentive for further illegal immigration

18. Lack of Reliability of Cost Estimates • SSA has been fairly inconsistent in its cost estimates • Use of false identities may affect costs • Actual number of beneficiaries may be in excess of estimated 50,000

19. Our Opinion of the Agreement • Relatively innocuous • If like other totalization agreements • Additional research on Mexican social security system should be done • Agreement should make sure to coordinate with current immigration laws • Important to keep in mind the agreement does not give away free money • Beneficiaries still must pay into the system

20. Current Status of Agreement • Signed on June 29, 2004 by SSA • Currently sitting on the President’s desk • Needs to send it to Congress • Congress has 60 days to veto the agreement • This has never happened before • Actually may be unconstitutional

21. Questions?