COST ESTIMATES FOR A TOTALIZATION AGREEMENT

1. COST ESTIMATES FOR A TOTALIZATION AGREEMENT CHRIS CHAPLAIN SOCIAL SECURITY ADMINISTRATION OFFICE OF THE CHIEF ACTUARY May 23, 2007

2. What is a totalization agreement? • Bilateral agreement between the U.S. and a foreign country • Eliminates double Social Security taxation for individuals working in a foreign country • Provides social insurance benefits for individuals who divide their work careers among countries • U.S. currently has 21 such agreements in force—with many European countries as well as with Japan, Australia, Chile, and South Korea

3. Major components of estimates provided by SSA’s Office of the Chief Actuary • Eliminate Double Social Security taxation • Applies to both U.S. and foreign country • Added Social Security benefits for some • Applies to both U.S. and foreign country • Number of people affected for each component • Short-range estimates • Long-range estimates

4. Reduction in U.S. Social Security tax contributions: • Who is affected? • Primarily individuals working for a foreign firm at their operations in the U.S. They pay taxes to both countries’ systems without totalization • Employment in U.S. is expected to last less than 5 years • Would no longer pay U.S. Social Security tax • Estimating number of workers affected • Consider ratio of [Certificates of coverage (CCs) issued]/[Visas issued] for countries with which U.S. already has a totalization agreement • Estimating the dollar effect on taxes • Multiply numbers of workers affected by average contribution per worker • Relatively high wages assumed • Average duration of employment in U.S. generally assumed as 3 years

5. Reduction in Social Security tax contributions to foreign program: • Who is affected? • Primarily individuals working for a U.S. firms at their operations in the foreign country. Without totalization pay to both countries • Duration of employment in the foreign country is expected to be less than 5 years • Estimating numbers of workers affected • Use data from existing agreement countries, consider ratio— [Certificates of Coverage issued]/[Number of individuals with foreign earned income exclusion on IRS tax return for U.S. workers] • Estimating dollar effects on taxes • Multiply numbers affected by average contribution per worker • Average duration of temporary employment assumed as 3 years

6. Additional Social Security benefit payments by United States program Who is affected? Two major groups: • U.S. workers becoming totalized beneficiaries • Individuals become eligible for benefits by counting work performed in both the U.S. and foreign country for eligibility purposes (U.S. and foreign country) • Receive pro-rata benefit • Non-U.S. citizen dependents and survivors no longer affected by a specific 5-year residency requirement

7. Additional Social Security benefit payments by United States program:Numbers affected (continued) • Numbers of U.S. workers with totalized benefits • Use specific data in statistical analysis (regression): • Nonimmigrant visa data from about 30 years ago obtained from State Dept. • Estimate totalized U.S. beneficiaries from individuals immigrating to U.S. relatively late in life (age 52 or later) from 2000 5% Census file • Estimate emigration from U.S., as 25% of the immigration at ages 22-30 from 2000 5% Census file (individuals would have some work in U.S. but not enough to qualify for benefit) • Results from regression phased in over the first 5 years that agreement is effective, based on experience of past totalization agreements • Not used for Mexican agreement estimates…

8. Added Social Security benefit payments by United States program:Numbers affected (continued)--Mexico Some specifics of estimate for Mexican workers • 2003 most recent published estimate by our office • Census file data is not as meaningful for Mexico because Mexico is a border country--lots of “circular migration” • Study from Public Policy Institute of California showed that, for people immigrating from Western Mexico and later return, about the same number of people stay here 2 to 10 years as the number of people who stay here for more than 10 years • Currently about 50,000 U.S. Social Security beneficiaries live in Mexico (though not all Mexican citizens) • Based on above study, assume that roughly 50,000 Mexicans would work at least 6 QCs in U.S. and live in Mexico now, becoming eligible for totalization benefits • Gradually phase in stock of 50,000 over first few years • Increase of 3-fold relative to all Social Security beneficiaries in long-term

9. Added Social Security benefit payments by United States program:Numbers affected (continued) Alien (non-U.S. citizen) dependents and survivors-- • In general, non-citizens may not receive benefits if they reside outside the U.S. for more than 6 consecutive months • In most countries, exceptions for workers with enough quarters of coverage and their dependents if lived at least 5 years in the U.S. in same relationship to the worker • Dependent aliens of many will not receive Social Security benefits if they fail to meet the 5-year residency requirement • Totalization agreements remove this 5-year residency requirement • For potential Mexican agreement, we estimate that roughly 15,000 such individuals would be affected

10. Added Social Security benefit payments by United States program:Amount of benefits • Individuals becoming eligible for benefits by counting work performed in the U.S. and foreign country • As a guide, average U.S. totalized benefit in December 2006 for existing agreements is about $188 • Reflects existing agreements--mostly Western Europe • Alien dependents and survivors who start receiving benefits due to eliminating 5-year residency requirement • Use average benefit data from SSA administrative records

11. Added Social Security benefit payments by foreign program:Numbers affected Individuals becoming eligible for benefits by counting work performed in the U.S. and foreign country • Usual methodology for totalization estimates involves analysis of 2000 5% Census file-data on place of birth, year immigrated, and age • Retirement benefits from Census file--examine individuals at or near retirement age, year of immigration and who have worked at least some since immigrating to estimate the potential group who might qualify for totalized benefits • Estimate a small percentage of the potential group would actually get totalized benefits • Similar analysis for disabled workers • Dependents/survivors obtained as a percentage of retired and disabled workers estimated above

12. Added Social Security benefit payments by foreign program:Numbers affected (continued) Estimate those becoming eligible for benefits by counting work performed in the U.S. and foreign country • Consider emigration as well • For totalized benefits from foreign program, take into account eligibility requirements of that country (NRA, disability requirements, etc.) • Results phased in over first 5 years agreement is in force

13. Added Social Security benefit payments by foreign program:Amount of benefits • Review benefit levels of foreign Social Security system for type of beneficiary • Review qualification requirements of foreign system to estimate pro-rata benefits under totalization • Benefit levels are subject to exchange rate between the foreign currency and the U.S. dollar

14. Long-range estimates • Done only for U.S. Social Security system • Defined as estimated 75-year cost, expressed in present value terms • Indication of whether effect of the agreement is “negligible” (i.e., dollar effect is less than 0.005 percent of taxable payroll over the 75 years) • Standard measure used by OCACT in estimating effect of reform proposals • Most agreements have estimated 75-year cost much lower than the “negligible” threshold (roughly $13 billion PV for the 75-year period as a whole) • Mexico estimate (2003) just below “negligible” threshold.