Social security totalization and the Windfall Elimination Provision

This blog entry is a spin-off from post comments earlier this week. I really want to talk about Japanese visa pitfalls, but I’m getting responses that go to something called “social security totalization”, and an obscure rule called the Windfall Elimination Provision.

So this is my good deed for the day.

The United States made a treaty with Japan, which was effective five years ago this week: October 1, 2005. In it, America promises to credit the Japanese who work in America short-term and pay into our social security for the years that the Japanese also pay into their nenkin system.

So, for example, if someone had paid 20 years into Japanese nenkin and five years into U.S. social security, the Social Security Administration would send the Japanese a fractional social security check for the five years, even though the individual does not have the requisite 40 credits (40 quarters), which is 10 years of coverage. Uncle Sam will count five of the Japanese years.

What happens on this side (Japan side) is that Japan will credit the years of participation in the U.S. Social Security system toward vesting in the Japanese kokumin nenkin (kousei nenkin, etc.) You need 25 years total.

A reader asks if it is better to try to get a full 10 years of U.S. social security AND 25 years in the Japanese nenkin–either by actual payments or by a special rule available to permanent residents called kara kikan.

I say the answer is: no. Based on current law, you always want to qualify by treaty. This is because of something called the Windfall Elimination Provision.

As the social security commentary says:

CLICK TO ENLARGE.

As Reader Chuckers quotes the Social Security site:

“If you qualify for Social Security benefits from both the United States and Japan and you did not need the agreement to qualify for either benefit, the amount of your U.S. benefit may be reduced [by WEP].”

Windfall Elimination Provision (WEP) is its own can of worms. It basically takes away all or part of the benefit in the “90% bend point”. If you study how U.S. social security works, you learn that lower average earnings are accorded more weight in determining your social security check. This is so that someone earning minimum wage all their lives can get a retirement check that’s at least, say $660; but practically, it’s a big giveaway from the Northeast to the states of the South and the square states of the Far West. Because we all have this subsidy incorporated into our social security. Your first $300,000 of “covered earnings” is creating this nice $660 check. It takes much more than $300,000 to get another $660. (I think it takes another $850,000 in fact.)

Because someone went bragging in the 1970’s about how they could get a $200 social security check (which was like $660 today), plus their military pension or some state pension where they didn’t have to pay social security taxes, Congress threw in WEP. It creates its own injustices, but it’s there.

So lesson is: you avoid Windfall Elimination Provision.

Now, this is not the most hit blog of Tokyo, or even Japan. But it does get a lot of hits on this issue. I’m saying maybe several hundred or a thousand over a year. It may the same 30 people for all I know. And here I am sitting here, wondering . . . how the career is going to go, you know. So that said, I’m telling you, you always want to qualify with the treaty. WEP is bad. You don’t want that.

I know the treaty could go away in the future, because Japan is breaking it as it usually does treaties. But the chances are if that happened, Congress would cover Americans who relied on the treaty with the money it would no longer have to pay the short-term Japanese. There are many more of them than us, so there’s plenty of money to make us whole. It wouldn’t simply be that Japan screws us nenkin payers, and the short-term Japanese get to keep their social security, although that would be par for the course with some of the whoring that “Pacific Elite” Americans do.

If you don’t trust the treaty, then you do what you have to do. My own feeling is, though, that you never want to do something that puts you in WEP unless you are netting a lot more pension money from whatever pension you would collect. Net-net, it might work out for you. But practically, no.

Let me stop here except to point out that my rates are reasonable!

9 thoughts on “Social security totalization and the Windfall Elimination Provision

  1. Hoofin,
    Thank you. I really appreciate your taking the time to explain this.
    And I am sorry for my role in the topic-jacking of your previous post.

    Yet, since you have started a new post on this…

    I agree with your conclusion that WEP is best avoided.
    But I still have this lingering concern: Is it really possible to receive a Japanese pension and avoid WEP?
    You seem pretty confident that WEP will not reduce your US benefits as long as your qualification for a Japanese Pension is based on the Totalization Treaty. And you may very well be right. You certainly know far more than me about the topic.

    But it seems to me that saying (as you quote the SSA):

    “If you qualify for …benefits from both (countries) and you did not need the agreement to qualify for either benefit, the amount of your U.S. benefit may be reduced [by WEP].”

    is different from saying (as you seem to be):

    “If you qualify for …benefits from both (countries) and you DID need the agreement to qualify for either benefit, the amount of your U.S. benefit WILL NOT be reduced [by WEP].”

    On the other , the other quote (offered by Chuckers) from the SSA expanation of WEP does seem relevant:

    “If you work for an employer who does not withhold Social Security taxes from your salary, such as a … an employer in another country, the ­pension you get based on that work may reduce your Social Security benefits. ”

    SSA Pub. 05-10045 has a list of exceptions (cases where WEP does not apply), but nothing mentioning foreign pensions based on totalization treaties.
    Can you point me to some clearer evidence supporting your interpretation?

    One more “detail”:
    You write above that, “(WEP) takes away all or part of the benefit in the “90% bend point”. ”
    My understanding is that WEP will never take away “all” of one’s benefit in the 90% bend point. I think that the 90% bend point is currently $761. So a full benefit would be 90% of that ($685). WEP reduces the percentage in 5% increments down to 40%. So the worst case scenario is that you get only 40% of the first $761 of your benefit (or about ($304). WEP doesn’t reduce the other bend points at all.
    Also, the maximum reduction is limited to 50% of your non-social security pension (Japanese Pension).
    So, if your Japanese Pension is about 20,000 yen (the illustration you gave Ben), I wonder if your US benefit won’t be reduced by a little over $100 a month?
    Maybe I’m way off-base…

    In any case Hoofin, please don’t misunderstand me. I not trying to be argumentative. I just really want to clarify my understanding.

    I think you could be on to something: financial consulting on tax and pension matters for expats here in Tokyo.
    I’d pay reasonable fees for sound advice on such matters!

    Thank you again.

    1. Doug,

      I appreciate that you gave me the opportunity to speak a bit about it. It’s the people who make me feel like, “hey, you lazy bum, why aren’t you at the top of your career?!”, that put me in the frame of mind that I give it away. I know that the New Jersey and Pennsylvania bars encourage attorneys to give something back to the community. So maybe this gets to be my way, even thought my readership is from all over the place.

      OK, I like you. So let’s go over your questions:

      I agree with your conclusion that WEP is best avoided.
      But I still have this lingering concern: Is it really possible to receive a Japanese pension and avoid WEP?

      You seem pretty confident that WEP will not reduce your U.S. benefits as long as your qualification for a Japanese Pension is based on the Totalization Treaty. And you may very well be right. You certainly know far more than me about the topic.

      My source is the Social Security Administration.

      http://www.ssa.gov/international/Agreement_Pamphlets/japan.html#wep

      It says: “If you qualify for Social Security benefits from both the United States and Japan and you did not need the agreement to qualify for either benefit, the amount of your U.S. benefit may be reduced.” Notice the “not”. This means that if you are clear with Japan without the treaty (25 years or kara kikan), and you have the 40 quarters or credits in America, you will be subject to WEP under current law.

      As you see, it’s not in the WEP literature, it’s part of the language describing the U.S.-Japan totalization treaty. They are saying that if you didn’t need the treaty, you will be subject to WEP. As you read about WEP and I’ll discuss it if necessary, you need a lot of fairly well-paid years in, in the U.S. system, to avoid it entirely.

      One more “detail”:

      You write above that, “(WEP) takes away all or part of the benefit in the “90% bend point”. ”

      My understanding is that WEP will never take away “all” of one’s benefit in the 90% bend point. I think that the 90% bend point is currently $761. So a full benefit would be 90% of that ($685). WEP reduces the percentage in 5% increments down to 40%. So the worst case scenario is that you get only 40% of the first $761 of your benefit (or about ($304). WEP doesn’t reduce the other bend points at all.

      That’s right, and it’s one of the pitfalls of blogging compared to reporting or publishing, that there isn’t an editor involved. (So, I also modified my main post chart, above, for another ambiguity—what you get if you don’t qualify under the treaty for both.)

      When I was talking about the benefit of the 90% bend point, I meant that it’s the fact that it isn’t the 32% bend point, more or less. If, as you know, you can be credited for 90% of AIME, that’s great. If it’s something like 32%–or even 40%, which is near 32%–that’s not so great. So that’s what I meant by “benefit”. Yes, it would not go to a 0% benefit on that level of AIME. I dunno, maybe that’s obvious.

      Also, the maximum reduction is limited to 50% of your non-social security pension (Japanese Pension).

      So, if your Japanese Pension is about 20,000 yen (the illustration you gave Ben), I wonder if your US benefit won’t be reduced by a little over $100 a month?

      You are right. If I were under WEP, the reduction would be no more than 10,000 yen, whatever that exchanges to in U.S. dollars. But I wouldn’t be under WEP, because I rely on the treaty. I think it’s mathematically impossible—almost—for me to get 25 years in the Japanese system. And I would never apply for kara kikan. (That’s the thing, IMHO, you don’t do!)

      Maybe I’m way off-base…

      No, they are good considerations.

      I think you could be on to something: financial consulting on tax and pension matters for expats here in Tokyo.
      I’d pay reasonable fees for sound advice on such matters!

      I am all for it. I just need the client base!

  2. “And I would never apply for kara kikan. (That’s the thing, IMHO, you don’t do!)”

    If you are relying on the treaty for qualifying in Japan, I think you need to apply for kara kikan. I believe I have read that credits used to fulfill the Japan requirements from wherever are counted as kara kikan in Japan and the amount of Japanese pension you will receive will be reduced.

    1. What is your source? Kara kikan is something that you apply for, and it’s only available to permanent residents [as opposed to so-called short-term expats. It’s of course also available to Japanese.] The treaty is an entirely separate matter. When someone qualifies under the treaty, they do not need kara kikan.

      1. Sorry for the late reply. My post was written as I was heading out the door.

        As it happens, I can’t find my “source” any more which makes me think I might have inferred it based on a bunch of other things.

        The basis for that was how I perceived the SIA (Japan) would count your US based credits for qualifications in the Japanese pension system. All the other examples I have seen (which don’t directly include the treaty example) have said that if you are in the Japanese system and they don’t have a record of a payment for Nenkin, you are either classified non-paying (“minou”) or gapped (“kara kikan.”)

        My interpretation was that when you apply for Japanese pension under the treaty, the SIA would look at the period you have submitted for (regardless of nationality or visa status during that time) and would count the US bits you worked. Work when you were 20 (or whenever) in the US would be classified as “kara kikan” by Japan because (under the treaty) they wouldn’t call it “minou” (non-payment) because you paid the US for it.

        The SSA (US) *appears* to do that according to the Tokyo US embassy website according to the social security FAQ. It states that when you apply for SS from the US, you *might* get a letter from Baltimore saying that you don’t have enough credits for US SS. They will then go to the Japanese government and see if you have been paying into the Japanese system long enough to qualify.

        http://tokyo.usembassy.gov/e/acs/tacs-fb-faq.html

        Again, that was my interpretation and likely may not correct so I will withdraw my claim. Direct questions to the SIA and the SSA are probably about the only way to find out for sure and you are likely still going to get a “no” and a “yes” from both agencies regardless of how/who you ask.
        Since the treaty has only been in effect for 5 years so far, there will likely be a lot of civil servants that don’t know how to deal with these cases as they aren’t likely all that many cases of it just yet.

        1. Chuckers, responding to you:

          The basis for that was how I perceived the SIA (Japan) would count your US based credits for qualifications in the Japanese pension system. All the other examples I have seen (which don’t directly include the treaty example) have said that if you are in the Japanese system and they don’t have a record of a payment for Nenkin, you are either classified non-paying (“minou”) or gapped (“kara kikan.”)

          Yes, this sounds like the plain vanilla situation. but, my understanding is that kara kikan is something that has to be applied for. You can’t just say, “hey, I was kara kikan at that time.” I don’t think that treaty years automatically become kara kikan. How can they? The claimant was not in the system in those years. I think the rule for PR was that Japan would let people who get the permanent residency go back and claim the time (some or all time) since they were 20 as kara kikan–again, by filing a form. But since the treaty overrides the kara kikan scheme, there is no need to do this.

          By the way, SIA (Social Insurance Agency) is now gone, replaced by the Japan Pension Service (JPS).

          My interpretation was that when you apply for Japanese pension under the treaty, the SIA would look at the period you have submitted for (regardless of nationality or visa status during that time) and would count the US bits you worked. Work when you were 20 (or whenever) in the US would be classified as “kara kikan” by Japan because (under the treaty) they wouldn’t call it “minou” (non-payment) because you paid the US for it.

          It is neither kara kikan nor minou. It is time in the corresponding country’s national pension program that is credited via the totalization treaty.

          The SSA (US) *appears* to do that [edit: pretend you were in the system] according to the Tokyo US embassy website according to the social security FAQ. It states that when you apply for SS from the US, you *might* get a letter from Baltimore saying that you don’t have enough credits for US SS. They will then go to the Japanese government and see if you have been paying into the Japanese system long enough to qualify.

          No, that’s not exactly what is going on. A Japanese who worked in America may have earned 19 credits. They need another 21. The U.S. social security administration is not going to give the Japanese applicant another 21 based on participation in the Japanese pension program. They are going to look at whether the Japanese has enough participation in the Japanese system to be the equivalent of 21 credits, and, if so, allow a U.S. claim for social security on the 19 credits. This check will be pro-rated as if the Japanese had spent their entire contributing life (i.e. top 35 years) in the U.S. system.

          Since the treaty has only been in effect for 5 years so far, there will likely be a lot of civil servants that don’t know how to deal with these cases as they aren’t likely all that many cases of it just yet.

          EVen though the treaty has (ha ha!) “only” been since October 1, 2005, the claim of any living Japanese person who can make the equivalent of 40 credits under U.S. social security is valid. This means, if they worked in the 1960’s, ’70’s, ’80’s, or later in a job covered by U.S. social security, they can potentially get a check.

          Since the U.S. system is comparably smooth and efficient (collected as a tax on wages) compared with the harebrained Japanese scheme (treated as a private company annuity plan, separate from work), there are many more Japanese who are likely to benefit from the U.S. system than vice-versa. Plus, the United States is only requiring that the Japanese show 10 years (40 credits) participation. So a Japanese could theoretically qualify for the U.S. system, and by some fluke not qualify for the Japanese system! (Example: only pay 5 years’ nenkin in the Japanese system, and work for 5 years in the U.S.)

          The U.S. program is computerized. The Japanese only has to provide the SSN for their work record, and fill out the form to share the information from the Japanese system. Someone in social security will hit the code for totalization in the system, and the computer will do the rest. Unlike Japan, the U.S. has been pursuing totalization treaties since the 1970’s. Social security has been doing this kind of thing for decades.

          The Japanese might be a different story. But even there, I would think that if someone provides their nenkin techo and/or book number, and refers to the appropriate totalization treaty, the Japanese bureaucracy is capable enough to do the rest.

  3. Thank you again, Hoofin, for your explanation.
    As indicated in my original question, I had previously only considered whether it would be better to qualify independently in each system (US and Japan), or whether doing so would be basically equalivalent to qualifying under the totalization treaty.
    I never imagined that qualifying under the treaty might be the better option.
    A totally new perspective for me; Thank you for your insight.

    Just goes to evidence (or at least allegorize) the potential market base for the services you propose to offer.

    Thanks.

  4. As this post is quite old, not sure if this question will be seen…A quick question, though. I worked in Korea for 35 years and due to bad timing and poor advice, I did not qualify for a monthly pension. Instead, I received lump sum payout. I was part of the Private Teachers Pension Program, not the Public, so I do not know if the SS agreement between the two nations applies. Recently I qualified for US SS, mostly to be eligible for Medicare. SS informs that the WEP will apply in my case. A while back I read online a paper by a scholar who stated that in the case of countries which had an agreement with the US, lump sum payouts were not subject to the WEP. Do you have any insights into this? Or know where I might look. Thanks. jay

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