Stephanie Hunter McMahon is a professor of law at the University of Cincinnati College of Law. Galina Seregina is a research assistant at the University of Cincinnati College of Law and received her LLM from the institution in 2020.
In this article, the authors examine bilateral totalization agreements, which allow many workers to qualify for benefits in at least one country, and the U.S. windfall elimination provision, which reduces U.S. benefits if workers receive a pension from a non-covered source, as well as the litigation that arises when those measures intersect.
Copyright 2020 Stephanie Hunter McMahon and Galina Seregina. All rights reserved.
- I. Introduction
- II. Mechanics of the U.S. Payroll Tax
- III. Debates in Cases
- A. When Only the Windfall Provision Applies
- B. When Only Totalization Agreements Apply
- C. Provision-Agreement Interaction
- IV. Conclusion
When people work in the United States and at least one other country during their careers, totalization agreements make it more likely that they qualify for state retirement benefits in at least one country, but the windfall elimination provision reduces U.S. benefits if they receive pensions from non-covered sources. This article explores those provisions and the litigation that arises when they intersect.
Working in multiple countries over the course of one’s career has become easier (except, of course, during COVID-19-related restrictions). Many companies employ both U.S. and non-U.S. citizens.1 Unfortunately, international coordination of public retirement contributions and benefits, as well as general international taxation, may complicate worker mobility. Splitting a career between two (or more) countries forces a worker to question where he has made contributions to a retirement system, where he wants to retire, and where, if anywhere, he will be eligible to receive social benefits.
When people work in the United States and at least one other country during their careers, they may receive retirement benefits from one, both, or neither. Partially governing their entitlement to benefits, totalization agreements are negotiated between countries to eliminate dual social security coverage.2 Totalization agreements also provide that work qualifying for coverage in different countries may be combined to pass eligibility thresholds in one country. Litigation has arisen over the interaction of totalization agreements and the U.S. windfall elimination provision, which generally reduces Social Security benefits if workers receive benefits from sources for which their work did not require contributions to Social Security.3 The windfall elimination provision may apply to work in a foreign country. Because the provision has an exception so that payments based on totalization agreements are not subject to its reduction, taxpayers have litigated the interaction of the two rules for 25 years in the hopes of maximizing their benefits.
That litigation continues partly because of what may appear to be inconsistent results and the importance of three little words: “based on a.” Courts have given tremendous weight to whether a worker’s benefits are based on a totalization agreement and therefore qualify for the exception to the windfall elimination provision. For example, in one case, a Spanish citizen who emigrated to the United States disputed a reduction of his Social Security benefits.4 Following a review of the Seguro Obligatorio de Vejeze Invalidez, the Spanish pension program under which the claimant received benefits, the U.S. court sided with the worker because his Spanish benefits were based not on his earnings but on his Spanish citizenship. In 2019, 12 dual citizens of the United States and Canada filed a case making similar arguments.5 They lost, however, because their payments resulted from their qualification under each program and were not found to be “based on a” totalization agreement so that the windfall elimination provision applied to reduce their U.S. benefits.
This article calls attention to international employment taxation and the application of payroll taxes and Social Security benefits to workers in the United States. It operates as a roadmap of applicable law and helps prepare foreign persons who come to work in the United States, highlighting the application of the windfall elimination provision and totalization agreements.
II. Mechanics of the U.S. Payroll Tax
Payroll taxes are a ubiquitous part of the U.S. tax system; however, because they are withheld from most workers’ paychecks, many people do not pay much attention to them. Moreover, not everyone in the market owes payroll taxes. For those who do, the taxes can constitute a large portion of their wages.
1. What FICA Does
The Federal Insurance Contributions Act is the largest payroll tax in the United States and operates in addition to the Federal Unemployment Tax Act. Together, those taxes raise more than 35 percent of the federal government’s revenue.6 FICA finances much of the U.S. social safety net in the form of Social Security, disability (Old-Age, Survivors, and Disability Insurance program (OASDI)), and Medicare.7
This article focuses on Social Security because of recent and continuing litigation on some international aspects of benefit amounts. Entitlement to full Social Security benefits is less clear than with Medicare, with inbound workers eligible for Medicare coverage (with Part A premiums waived) if they are at least 65 years old, have been permanent legal residents for five continuous years, and they or their spouses (or qualifying ex-spouses) have paid Medicare taxes for at least 10 years (40 quarters of covered work). If contributions were for less than 40 quarters, inbound workers must pay monthly premiums, even for Part A coverage. Disability benefits from OASDI are payable to disabled inbound workers who have completed at least 20 quarters of coverage during the previous 40 quarters (five of the past 10 years in a job or multiple jobs from which Social Security taxes were withheld).8
Originating in the Great Depression of the 1930s, FICA has been amended — a lot — and its tax rates and program benefits have risen significantly since the enactment of Social Security and Medicare. The rates started at less than 3 percent; now, for both employer and employee portions of Social Security and Medicare, the rate is more than 15 percent. The portion funding Social Security and disability has a total 12.4 percent rate.
At more than 15 percent, payroll taxes constitute a major portion of most individuals’ tax burdens, particularly among lower-income taxpayers. One estimate is that 75 percent of taxpayers pay more in payroll taxes than they do in income taxes.9 Therefore, it is especially significant that those taxes have a flat rate structure; in fact, the Social Security tax is regressive because it does not apply to all of some workers’ incomes. There is also no standard deduction or exemption to reduce the tax’s impact on the lowest-income taxpayers.
As a separate statutory regime from the Internal Revenue Code, Congress provided that the IRS is responsible for collecting FICA and the Social Security Administration is responsible for administering the Social Security program.10 That administration is critical, because Social Security and Medicare are two of the largest entitlement programs in the United States, constituting over 36 percent of federal expenditures in 2019.11 The programs are entitlements because their benefits are owed regardless of annual appropriations legislation.12 It would take a change in underlying legislation to change their payout structures.
2. FICA’s Application to U.S. Workers
FICA does not apply to all workers, and not all workers are entitled to Social Security benefits. Instead, FICA is imposed only on employees’ wages and is subject to numerous exceptions; when an exception applies, the work is not covered employment for benefits purposes. Generally, a worker receiving a Form W-2 owes some amount of payroll tax. An owner of a business does not automatically qualify as an employee and, depending on the type of business entity, might not owe FICA or qualify to participate in the Social Security system. Independent contractors and other self-employed workers can be viewed as both employees and employers and owe self-employment taxes similar to FICA. Therefore, the first step for identifying if a person owes under FICA is to classify her.
Some business owners may qualify as employees for Social Security purposes. For example, owners of S corporations can be treated as employees for payroll tax purposes, and even when they try to disguise payments as ownership returns rather than salaries, the IRS has assessed payroll taxes for unreasonably low salaries (or when none are paid).13 Partners of entities taxable as partnerships are not treated as employees but as self-employed, unless they hold a limited partnership interest, in which case they owe neither FICA nor Self-Employment Contributions Act (SECA) taxes. Owners of C corporations may also be employees; however, distributions on their shares are not taxable as salaries, although the IRS may recharacterize payments if salaries are unreasonably low.14 Holding an interest in an entity for investment by definition is not employment, so FICA and self-employment tax would not apply.15
For those qualifying as workers in the United States, not all of their work is subject to Social Security tax or eligible for Social Security benefits. Employment that is taxed for Social Security is covered employment, whereas employment that is exempt from Social Security is non-covered employment. For example, some state, county, and municipal employees may receive state-funded retirement benefits and not be required to pay FICA because their wages are withheld (or treated as withheld) to pay for state or local retirement plans. Since 2005, employers must provide Form SSA-1945 to new employees if their jobs are not covered by Social Security.16
When applicable, Social Security tax is imposed on both employer and employee. For the self-employed, the worker pays it all under SECA. Under FICA, employers pay half of payroll taxes and employees pay the other half. Under SECA, independent contractors and the self-employed pay both portions.
Those subject to FICA do not necessarily owe tax on all of their income.17 As of 2020, FICA is a 15.3 percent tax on the first $137,700 of wages an employee earns (indexed annually for inflation).18 That means that the maximum Social Security tax an employee can pay in 2020 is $8,537.40, and that any wages he earns in excess of $137,700 are not subject to the Social Security tax (although an additional 0.9 percent tax may apply to high-wage earners for Medicare). If an employee has multiple employers, he receives a refundable credit for his portion paid on wages in excess of the cap; however, each employer must always pay its full portion, which can result in employers collectively paying more than the $8,537.40 maximum amount per employee.
The self-employed who must pay both portions of Social Security taxes receive an above-the-line deduction for the employer’s share.19 Thus, they owe income tax only on half the amount paid in payroll tax. There is no deduction or reduction for the payroll tax itself; it remains a full burden on self-employed workers.
3. FICA Triggers for Inbound Workers
Not all workers in the U.S. economy work their entire careers in the United States. Because the circumstances that drive people to work in different locations are personal, and census data does not cover many of those workers, it can be difficult to estimate how many people work abroad permanently or temporarily and how many workers are in the United States as temporary or relocated workers. In 2016 the U.S. State Department estimated that about 9 million U.S. citizens were working outside the United States, and it confirmed that number in 2018.20 In 2019 more than 28 million foreign-born workers were estimated to be working in the United States, constituting about 17 percent of the total workforce.21 Those workers may owe payroll taxes to multiple jurisdictions over their lives.
When non-U.S. workers enter the U.S. labor market, they are subject to the same payroll tax obligation as U.S. citizens unless an exception applies.22 That obligation applies from the first dollar earned; there is no de minimis exception. For those subject to the tax, their employment in the United States is covered employment for Social Security purposes, potentially entitling them to benefits. A foreign person staying in the United States for longer than 183 days satisfies the substantial presence test for the calendar year and is generally treated as a U.S. tax resident receiving U.S.-source income and subject to U.S. payroll taxes. That default can be overcome by bilateral agreement. Because international coordination is desirable to ensure the same wages are not taxed in more than one country, bilateral agreements normally apply source rules; however, they permit residence-based exceptions in limited circumstances.23
There are exceptions so that non-U.S. citizens working in the United States do not owe U.S. payroll tax, so their work is non-covered work for Social Security purposes. Foreign workers coming to the United States for a temporary assignment of less than 90 days in a tax year (or longer if they were unable to leave the United States because of COVID-19-related travel restrictions) and employed by a non-U.S. employer are not required to contribute to the U.S. Social Security system. International students and foreign researchers and scholars who enter the United States on J-1, F-1, M-1, and Q visas and work in the United States while pursuing degrees from the U.S. education system or in practical training are also exempt from U.S. payroll taxes if their work was duly authorized by U.S. Citizenship and Immigration Services. Household employees and agricultural workers (on H-2A visas) are exempt unless otherwise agreed with an employer. Employees of foreign governments and international organizations can be exempt from Social Security contributions if requirements of international treaties are met.24 Other limited exceptions apply to residents of particular countries.25 Despite those exceptions, many non-U.S. citizens working in the United States pay into the Social Security system.
B. Social Security Benefits
1. How to Calculate Benefits Generally
Social Security benefits are calculated on payments of Social Security taxes paid by employees, employers, and self-employed persons. The payout structure is progressive. The result is that the return for workers in the bottom fifth of the earnings distribution who pay into Social Security is almost three times greater than that for the top fifth of earners.26 Their benefits as a percentage of their lifetime average wage income and as a percentage of total Social Security benefits are greater than those with higher lifetime average incomes.27
The progressive feature means that payouts are first limited by a threshold amount of contributions over a period of years. Even so, operating as a floor, qualifying workers must pay FICA or the self-employment equivalent for at least 40 quarters on at least $1,410 per quarter (the threshold amount is adjusted for inflation). As of 2020, that qualifies a worker for full retirement benefits at age 65, 66, or 67, depending on the worker’s year of birth.28 Choosing to receive payments earlier (as early as age 62) reduces the annual benefit, and delaying receipt until age 70 increases benefits.
The amount of annual benefits is calculated using a retiree’s average indexed monthly salary over the highest-earning 35-year period. That index of salary is allocated among three brackets — 90 percent, 32 percent, and 15 percent — at amounts that adjust annually with inflation. The retiree’s total monthly benefit is a combination of each bracket (see table).
Income up to $960
Income between $960 and $5,785
Income between $5,785 and $11,475
Note: For the government’s description of the formula process, see Social Security Administration, “Primary Insurance Amount” (2020).
Those percentages weight heavily for lower-income wages. The income a person earns above FICA’s ceiling ($137,700 in 2020) is not considered in that calculation but is also not taxed.
Not everyone who pays into Social Security can receive its benefits. Residency is generally not required for receipt of U.S. benefits, although benefits may be suspended in limited circumstances if a person lives abroad for over six months.29 Also, undocumented workers may be denied benefits.30 Some married couples do not receive benefits for one spouse’s contributions because spouses or divorced spouses (married for over 10 years before the divorce) are entitled to 50 percent of their spouse’s benefit if that amount is greater than the benefit based on their own earnings. Some low-income, one-earner married couples receive total Social Security benefits of 135 percent of the earner’s salary, and higher-income, two-earner couples receive benefits of no more than 43 percent.31 The structure also means that lower-earning spouses find their take-home pay is reduced by the tax despite it having no impact on their benefit.
When U.S. Social Security benefits are paid, recipients may not enjoy all the payments. For example, some recipients owe U.S. income tax on the payouts. Currently, U.S. Social Security benefits are partially taxable for those with more than $25,000 of annual income for single taxpayers and $32,000 for joint filers. Thus, for higher-income beneficiaries, Social Security payments are taxable under the income tax. Similarly, foreign-source benefits may be fully taxable in the United States if received by persons living there. The U.S. model income tax treaty provides source-based taxation of those benefits, but many treaties in force apply exceptions.32 Income taxation of benefits may add to the progressiveness of Social Security payouts, which targets greater benefits to low-income recipients.
C. Windfall Elimination Provision
Congress enacted the windfall elimination provision in 198333 amid worries that some recipients unduly benefited from Social Security’s progressive payout structure:
Social Security benefits are determined through a formula based on average lifetime earnings in jobs covered by Social Security. The benefit formula is weighted so that persons with low average life-time earnings receive a proportionally higher rate of return on their contributions to Social Security than workers with relatively high average lifetime earnings.
Workers with short periods of covered work also receive this advantage, because their few years of earnings are averaged over a 35-year period to determine their average monthly covered earnings on which the benefit is based.
This high rate of return for persons who have spent a short period of time in covered employment is what is often characterized as a “windfall” benefit.34
Without the windfall elimination provision, workers who work only a few years in jobs that pay FICA might enjoy higher benefits as though they were long-term, low-wage earners because of the averaging of their wages over the calculation period. Recipients were thought to unduly benefit from the system’s progressive payout structure by having larger amounts of wages reported over fewer years because they also worked at a job funding a pension that did not require the payment of Social Security taxes.35 In 2013 approximately 2.5 percent of the 1.5 million beneficiaries were affected by the windfall elimination provision.36
Through the windfall elimination provision, Congress created a formula that reduces Social Security benefits if recipients become eligible for monthly, periodic payments on earnings that did not require Social Security contributions.37 Instead of the normal three-prong calculation of benefits at the 90, 32, and 15 percent brackets, the first percentage is decreased to 40 percent in increments of 5 percentage points for workers with less than 30 years of coverage.38 Therefore, if a worker has at least 30 years of contributions to Social Security, she receives the full 90 percent calculation in the first prong; if she has only 21 through 29 years, she receives between 45 and 85 percent of that amount; and if she has only 20 years, she receives 40 percent of the first bracket.
There is a cap to that reduction. The windfall elimination provision cannot decrease the amount received from what would have been received without it by one-half or more. That guarantee sometimes results in smaller reductions than might otherwise apply.
The benefit reduction formula applies only to workers who receive pensions from non-covered work for which there was no contribution to Social Security while earning the right to the pension.39 An example included in the legislative history involved public-sector workers who might receive state pensions in addition to Social Security.40 Because any of their Social Security contributions would be over a smaller period because most of their work funded state pensions, they would receive reduced Social Security benefits. Later, courts confirmed that the windfall elimination provision also applies for employment outside the United States that is not covered under the U.S. Social Security system, whether from a foreign government or private employer.41 Therefore, U.S. benefits can be reduced if beneficiaries receive payments for non-covered work under a foreign social security system to avoid disproportionately high Social Security benefits. However, regulations exclude from the formula payments from a foreign social security system based on foreign residence or citizenship alone.42
Because the formula’s purpose is to eliminate higher benefits when contributions are made over a short period, workers who have at least 30 years of covered work are exempt from the windfall elimination provision. Therefore, if a worker divided her career between two countries and made contributions to the U.S. Social Security system for at least 30 years, the Social Security Administration cannot apply the windfall elimination provision to reduce the Social Security benefits paid to that worker.
The windfall elimination provision also contains three exceptions that exclude periodic pension payments from the formula to reduce Social Security benefits. One is for payments for non-covered work payable under the Railroad Retirement Act of 1937 or 1974, which applies mainly to U.S. citizens and not to inbound non-U.S. workers. A second is for payments based on U.S. military service. The third exception applies to workers who receive a payment from a foreign social security system based on a totalization agreement concluded between the United States and that country under 42 U.S.C. section 433. If one of those exceptions applies, U.S. Social Security benefits are not reduced as a result of the excepted payments.
Key to the windfall elimination provision is the difference between covered and non-covered work. The receipt of benefits resulting from non-covered work triggers the provision’s application. The provision does not apply to covered work, so recipients of benefits want their employment to be categorized as covered, as it would be under the three exceptions.
D. Totalization Agreements
In the United States, Social Security totalization agreements are international executive agreements with two primary functions.43 First, they allow workers who divide their careers between the United States and a country party to a totalization agreement with the United States to combine periods of work in both countries to qualify for retirement benefits in at least one of the two countries. Therefore, if a worker would fail to qualify for benefits in either country but has a minimum amount of coverage required by the relevant totalization agreement, he may combine years of coverage to qualify in at least one of the countries party to the totalization agreement. For example, to be eligible for the totalization of periods of work in the United States and a foreign country, a worker must earn at least six quarters of coverage in the United States, significantly less than the 40 quarters necessary for entitlement to Social Security benefits directly. Totalization agreements are not intended to affect the coverage of workers who are otherwise eligible for retirement in either country.44
Second, workers may apply totalization agreements to avoid paying social security taxes to more than one country on the same earnings.45 Thus, totalization agreements exempt wages from retirement taxes (in the United States, FICA and SECA taxes) if a worker pays similar taxes on the same earnings under a foreign retirement system. What constitutes a tax for totalization agreement purposes depends on the national law.46 The general principle is that an employee should pay taxes under the social security system of the country in which she works (a territoriality rule). Therefore, if an employee works in the United States, she contributes to the U.S. Social Security system and not to the social security system of a foreign country, and vice versa.47 Totalization agreements provide an exception for a temporarily relocated employee sent to work in another country for an employer who continues to pay social security taxes in the country from which the employee was transferred. Usually, that exception applies to temporary assignment for a period of less than five years.48
Although totalization agreements allow workers to combine periods of coverage to determine eligibility for Social Security benefits, under an apportionment formula, the U.S. share of benefits the worker receives is proportional to the covered period actually worked in the United States.49 The other country of employment pays its proportional share of benefits. Consequently, a person entitled to a totalized benefit may receive payments from one or both countries. A worker is never eligible to receive social security benefits from two countries for the same work or same periods of coverage.
The formula for apportioning benefits is the same for all U.S. totalization agreements. As with other benefits calculations, the Social Security Administration creates a theoretical earnings record, but for totalized benefits, the worker’s actual U.S.-based earnings for each year are divided by the national average wage for all U.S. workers in that year. The average value is the worker’s relative earnings position multiplied by the national average wage in each of the worker’s benefits computation years. That method projects what the worker would have earned over a full career in the United States, assuming constant earnings relative to the average wage. The standard U.S. Social Security benefit computation is applied to that theoretical earnings record to calculate the worker’s theoretical primary insurance amount. That amount is then prorated by the ratio of the quarters of coverage in the United States to the quarters that would constitute an entire career under U.S. law.
That formula, developed by regulation, is based on the power to enter totalization agreements granted by Congress to the executive branch. Totalization agreements are congressional-executive agreements, in that they are statutes written by the executive branch and enacted by Congress in a process unlike the regular legislative or treaty processes.50 Totalization agreements are automatically approved by Congress 60 days after their submission unless the House or Senate submits a resolution of disapproval.51 However, as bilateral agreements, they do not enter in force and become law until the other contracting country ratifies them.
As congressional-executive agreements, totalization agreements are one federal tool in international law that differs from other tools in how they are adopted by the United States.52 Treaties are the only international instrument referenced in the U.S. Constitution, which requires treaties be ratified by a super-majority of two-thirds of the Senate.53 Alternatively, sole-executive agreements are adopted by the executive branch alone. For example, the Paris Agreement on climate change was adopted by President Obama in 2016. Finally, congressional-executive agreements are adopted by a majority of each of the two chambers of Congress instead of the super-majority of the Senate.54 As for their operational power, treaties, sole-executive agreements, and congressional-executive agreements are equally binding on the United States.55
A critical difference is whether agreements are self-executing.56 Treaties and agreements that are not self-executing require the enactment of a statute to operationalize them; self-executing instruments do not require additional legislation but operate on the face of the agreement. Totalization agreements are self-executing as provided in section 233 of the Social Security Act and require no further congressional action to operate.57
The choice of international tool in a particular situation depends less on the content of the agreement than on established practice and political judgment.58 Totalization agreements are traditionally congressional-executive agreements, as are most other agreements involving international trade and taxation issues — the main exception being the income tax, which is usually coordinated through treaties.59 Thus, the framing of totalization agreements as congressional-executive agreements is likely to continue.
Because totalization agreements are negotiated between countries, they often contain provisions that vary country by country, in part because they are a product of the time when they are negotiated and accepted and in part because of the negotiation process. They also may differ depending on the provisions in an income tax treaty the United States has with the country.60
The United States began negotiating its first totalization agreement in 1973, building on Friendship, Commerce, and Navigation treaties meant to ensure that U.S. workers migrating abroad after World War II would not be subject to double taxation in foreign countries.61 However, those treaties often failed their objectives.62 In the 1949 Friendship, Commerce, and Navigation Treaty with Italy, the countries provided for the negotiation of a totalization agreement. However, the United States had neither precedent nor a statute authorizing that kind of agreement, and the Senate was not required to meet the two-thirds ratification requirement.63 Not until 1977 did Congress pass an authorizing statute that permitted the president to negotiate totalization agreements as congressional-executive agreements with countries that have retirement systems similar to that of the United States.64 Italy, Germany, and Switzerland were among the first countries with which the United States concluded totalization agreements; today, the United States has 30 totalization agreements in force.65
To use a totalization agreement to combine years for the qualification of Social Security benefits, on retirement an employee ineligible for social security benefits in any country must file a claim for benefits totalization at any U.S. Social Security office or in the applicable foreign country.66 That claim should be filed along with a claim for retirement, survivors, or disability benefits. Only periods of work registered on or after the effective date of a totalization agreement can be combined under the agreement.
To use a totalization agreement to claim an exemption from U.S. or foreign taxes because of contributions to one country’s retirement system, a person must secure a certificate of coverage from the other country’s social security agency. The certificate is to be given to the U.S. or foreign employer and should be kept by the employer because it establishes that the employee’s wages are exempt from the relevant taxes.67 If a U.S. citizen or resident is self-employed in a foreign country, she must attach a copy of the foreign certificate of coverage to her U.S. tax return each year as proof of the U.S. exemption from self-employment taxes.68 If a foreigner is self-employed in the United States, filing the U.S. certificate of coverage with the foreign tax and social security authorities depends on that country’s regulations.69
If a person is unable to secure a certificate of coverage, the employee or employer should get a statement from an authorized official or agency verifying that the wages are subject to social security coverage in that country, or from the U.S. Social Security Administration indicating that the wages are not covered by U.S. Social Security. The employer should also keep that statement.70
E. Provision-Agreement Interaction
The interaction of the windfall elimination provision and totalization agreements is mostly clear, based on the purposes of the provisions, but with sufficiently ambiguous language to spur litigation. To apply the windfall elimination provision to a taxpayer who worked in a foreign country often requires reference to a totalization agreement.71 Even so, the windfall elimination provision and the totalization provisions of totalization agreements (but not the provisions on avoiding the double taxation of earnings) should not apply simultaneously. If an employee is fully eligible to receive benefits from the social security systems of one or both countries, the totalizing provisions of a totalization agreement do not apply and the windfall elimination provision does, assuming the benefits received by the employee from the foreign country are based on his earnings. If an employee does not have sufficient quarters of coverage in any country and needs to totalize periods of work to qualify for a retirement system, then the totalization provisions of a totalization agreement apply and the windfall elimination provision does not.
Ambiguity arises because one of the exceptions to the application of the windfall elimination provision is when workers receive a payment by a foreign social security system based on an agreement concluded between the United States and that country under 42 U.S.C. section 433, which is a totalization agreement. According to the statutory structure and legislative purpose, the provision is intended to apply in the limited case when a worker receives proportional payments from more than one country because of the use of totalization to qualify under either regime. That exception does not change the interaction of the provisions but applies in the narrow instance when benefits are paid proportionately by country per the totalization agreement. In other words, if a totalization agreement applies to the facts and the payments received are based on it, the windfall elimination provision cannot be applied.
When the situation occurs that a worker receives payments from more than one country because of proportional payments under the totalization agreement, the windfall elimination provision does not reduce the benefits received from the U.S. Social Security system. The exception to the windfall elimination provision applies so that even if U.S. benefits are based on the totalization formula, the United States cannot use a worker’s receipt of substantial benefits from non-covered work in a foreign country to reduce U.S. benefits.
Thus, when a worker splits his career between covered and non-covered work in a foreign country, the windfall elimination provision generally applies to reduce the benefits he receives from the U.S. Social Security system. Only in the limited circumstance when each country pays a proportional share of benefits because the worker does not otherwise qualify under either regime does the special exception to the windfall elimination provision apply. Unfortunately for courts, however, the language may be read more broadly, and it is only the requirement that the payment be based on the totalization agreement that clarifies its limited applicability.
III. Debates in Cases
Despite their aim to increase fairness and clarify treatment, both the windfall elimination provision and totalization agreements have been subject to litigation because of the many facts and circumstances taxpayers encounter. Applying one or the other produces different outcomes;
nevertheless, judges have used a common approach to those cases by defining the legislative purpose of the provision and agreements. Focusing primarily on the legislative intent, courts have used it as a guide to avoid ambiguous interpretations of the law. Flowing from the congressional objectives, judges have interpreted those measures in different contexts without altering their original meaning.
A. When Only the Windfall Provision Applies
1. Rabanal v. Colvin
In Rabanal v. Colvin, 987 F. Supp. 2d 1106 (D. Colo. 2013), Jose G. Rabanal, originally a citizen of Spain, immigrated to the United States and disputed the reduction of his benefits by the Social Security Administration based on the application of the windfall elimination provision.72 Rabanal made no reference to Spain’s totalization agreement with the United States. The court relied on the original purpose of the windfall elimination provision, which it said was enacted “to prevent individuals who earned wages from both covered and non-covered employment from receiving an unwarranted windfall.” The court then turned to the specific wording of the windfall elimination provision to conclude that the provision did not apply to the case.
Rabanal based his argument on the fact that his benefits from the Spanish retirement system were not based on his earnings but on his Spanish citizenship and on the number of hours (days) he worked in Spain. The court agreed. It analyzed the wording of the windfall elimination provision, stating that benefits were to be reduced if a beneficiary receives payments for non-covered work “based in whole or in part upon his or her earnings for service.”73 The court concluded that the terms “earnings” and “work” were not equivalent. Relying on the governing regulation that provides that foreign benefits subject to the windfall elimination provision “include both pensions from social insurance systems that base benefits on earnings but not on residence or citizenship, and those from private employers,”74 the court concluded that the regulation expressly excluded from the windfall elimination provision any benefits based on residence or citizenship even if they were also based on working hours. Consequently, benefits based on the number of working hours and paid to all working citizens were not the same as benefits based on earnings. Therefore, the court held that receiving benefits for non-covered work based on number of working hours did not result in the application of the windfall elimination provision to reduce benefits.
Not all courts are likely to agree with the holding in Rabanal. In particular, courts may question whether benefits based on the number of working hours meet the definition of benefits based on citizenship and whether benefits based on citizenship and hours are properly excluded from the windfall elimination provision.75
2. Partipilo v. Berryhill
In Partipilo v. Berryhill, 2018 WL 1211577 (N.D. Ill. 2018), the taxpayer argued that his self-employment earnings in the United States, although not properly reported to the United States, should be used for calculating his benefits and that he should be subject to the windfall elimination provision. The taxpayer received full benefits from the Italian Instituto Nazionale Previdenza Sociale. Although self-employed in the United States in 1993 and 1994, he failed to file a tax return or timely report that income to the Social Security Administration. He argued that the windfall elimination provision was improperly applied to him for benefits that should have included those amounts.
The court concluded that the taxpayer received full benefits under the Italian retirement system, so the windfall elimination provision should be applied. However, because the administrative law judge failed to provide a thorough explanation of the formula used to calculate the taxpayer’s benefits, the case was remanded.
B. When Only Totalization Agreements Apply
1. Eshel v. Commissioner
Eshel v. Commissioner76 is one of the rare cases focused on the interpretation of a totalization agreement not in conjunction with the windfall elimination provision. The case arose not for social security benefits but for entitlement to foreign credits for the taxes paid, which are available for income taxes but not Social Security taxes.
Ory and Linda Coryell Eshel were dual citizens of the United States and France. In 2008 and 2009 Ory worked in France for a non-U.S. employer, and the Eshels paid all relevant taxes in France as French residents. Also, as U.S. citizens, the Eshels timely filed U.S. tax returns for both years and claimed tax credits for the French taxes they paid, including the French general social contribution (CSG) and the French contribution for the repayment of social debt (CRDS). CSG and CRDS are French social security taxes that came into force after the totalization agreement between the United States and France was entered.
The question before the U.S. Tax Court was whether the plaintiffs could claim credits for the CSG and CRDS if those taxes were paid under the totalization agreement between the countries.77 The contributions were clearly made during employment that resulted in coverage in France for the relevant period. The Tax Court concluded in favor of the IRS, stating that based on the dictionary definition, CSG and CRDS were adopted to amend and supplement the laws listed in the totalization agreement under which qualifying taxes may be paid. Thus, in the Tax Court’s opinion, the Eshels could not claim tax credits for the CSG and CRDS payments because they were for social security taxes paid under the totalization agreement.
The U.S. Court of Appeals for the D.C. Circuit reversed the Tax Court’s judgment and remanded the case for further proceedings, saying the Tax Court erred by interpreting the totalization agreement through the application of English dictionaries to the key terms of the agreement. The court emphasized that totalization agreements are executive agreements and, as with treaties, are to be interpreted based on the shared expectations of the contracting parties and the intent of the parties to the agreement. Reprimanding the Tax Court for failing to properly apply French law, the appellate court demanded that social security taxes be interpreted according to each nation’s expectation.
2. Robson v. Berryhill
In Robson v. Berryhill,78 the issue was largely the application of the U.S. totalization agreement between the United States and Canada. Richard Robson applied for application of the totalization agreement to combine his social security retirement credits from his work in Canada and the United States. He contested the reduction of his U.S. benefits for a range of reasons, including that the windfall elimination provision was unconstitutional, all of which the court summarily dismissed. However, the court said the windfall elimination provision should not be applied, using instead a formula for apportioning totalized benefits between countries. The court concluded that the U.S. portion of benefits was properly calculated.
C. Provision-Agreement Interaction
1. Newton v. Shalala
In the first case combining consideration of the windfall elimination provision and a totalization agreement, the taxpayer objected to the reduction of her U.S. Social Security benefits as a result of her receipt of a German pension.79 She split her time between Germany and the United States by working significant stretches in each country, for a total of 16.58 insurance years in Germany and 24 years in the United States. The U.S. government applied the windfall elimination provision to reduce her Social Security benefits by approximately $110 per month. The taxpayer argued that the exception from the windfall elimination provision for benefits under a totalization agreement should apply; however, the court concluded that she could not receive totalized benefits under the treaty because she fully qualified under each nation’s regime. Without the exception for totalized benefits, which was held not to apply, the court said the windfall elimination provision was properly applied and was rationally related to the achievement of legitimate goals.
2. Vanlerberghe v. Apfel
Six years later, a court confirmed the application of the windfall elimination provision to employment outside the United States, again holding that the totalization agreement did not apply to the case at issue.80 The taxpayer divided her career between the United States and Belgium and disputed the reduction of her U.S. benefits resulting from her receipt of Belgian retirement benefits. She had worked as a schoolteacher in Belgium and the United States for 17 and 14 years, respectively, and was eligible for retirement benefits in both countries based on the number of years worked in each. The U.S. Social Security Administration applied the windfall elimination provision and reduced her U.S. benefits on the theory that the work in Belgium was non-covered work under the statute.
The taxpayer did not dispute that her work in Belgium was non-covered under the Social Security Act and that the windfall elimination provision generally applied to her case. Instead, she argued that payments based on a totalization agreement were to be excluded from the scope of the windfall elimination provision. The court concluded, however, that her payments under the Belgian retirement system were based not on the totalization agreement but on the Belgian social security system. Focusing on the function of the totalization agreement, the court said the agreement was to combine periods of work to make a worker eligible for the retirement system of one country. Because the taxpayer was fully eligible for both countries’ retirement systems based on the period she worked in each, the totalization agreement did not apply to her case.
The taxpayer also argued that the application of the windfall elimination provision was based on a misinterpretation of the statute and that Congress never intended it to apply to cases like hers. Turning to the purpose of the windfall elimination provision and reviewing the relevant House Ways and Means report,81 the court concluded that the taxpayer’s 14-year career in the United States was “relatively short” in covered work, whereas her 17 years in Belgium was a substantial period of non-covered work. The windfall elimination provision’s purpose was to reduce the benefits paid to a beneficiary with a relatively short career in covered work also receiving payments based on substantial non-covered work, and the court interpreted that as applying to the taxpayer’s facts. It found that the IRS applied the windfall elimination provision based on a “reasonable, consistent and persuasive” interpretation of the provision.82
The court concluded that the taxpayer’s benefits were properly reduced and affirmed the IRS’s application of the windfall elimination provision. It paid great attention to the legislative objectives of the windfall elimination provision and totalization agreements as applied to the facts of the case, saying that affirming the IRS would further the purposes of both. The court focused on the theory underlying those provisions, pointing out that in this particular case, the purpose of the windfall elimination provision — to reduce the benefits paid to the beneficiary receiving payments for non-covered work — was applicable, but the purpose of the totalization agreement — to combine the periods of work when necessary — was not.
3. Hawrelak v. Colvin
In Hawrelak v. Colvin,83 Ronald Hawrelak contested the reduction of his U.S. Social Security benefits because of his entitlement to benefits under the Canadian system. Hawrelak had worked 24 years in the United States and 10 years in Canada, entitling him to benefits in both countries. He wrote to the Social Security Administration seeking assurance that the Canadian benefits would not affect his Social Security benefits. Sixteen months later, the U.S. government applied the windfall elimination provision and informed Hawrelak that his Social Security benefits would be retroactively reduced (it also initially charged him for the overpayment, which was later waived). The court refused to accept that the totalization agreement applied to the case because Hawrelak’s pensions were not based on a totalization agreement.
4. Kamyk v. Berryhill
In Kamyk v. Berryhill, the taxpayer argued that she should be entitled to full benefits from the U.S. Social Security system in addition to her pension from the Polish Zaklad Ubezpieczen Spolecznych.84 Having worked for 40 years, 18 of which were in the United States, was sufficient to qualify for a full pension in both countries. The taxpayer disputed the reduction of benefits resulting from the application of the windfall elimination provision because of the totalization agreement between Poland and the United States. However, the court concluded that she fully qualified for benefits from both countries and therefore had no rights arising under the totalization agreement.
5. Beeler v. Berryhill
The most recent case on the issue is Beeler v. Berryhill,85 in which dual citizens of the United States and Canada filed a case disputing the reduction of their U.S. benefits under the windfall elimination provision. Using a new argument under the totalization agreement, the taxpayers argued that the provision’s exception should apply because the period of foreign employment was employment under the totalization agreement.
The court sided with the government. Although it accepted that totalization agreements applied to more situations than those in which benefits were calculated on a totalized basis, the court concluded that covered employment in one country necessarily means non-covered in the other.
The taxpayers relied heavily on Rabanal, although the cases are easily distinguishable because the Beelers could not argue, as Rabanal could, that the benefits they received from the other retirement system were based on their citizenship and work hours, not their earnings. Instead, the Beelers’ primary argument was that the benefits they received from the Canadian and Quebec retirement systems were based on the totalization agreement and a separate understanding between the United States and Canada and Quebec, respectively.
The court noted that this case was much closer to Vanlerberghe; similarly, the Beelers did not prevail. As in Vanlerberghe, the taxpayers in Beeler were fully qualified to receive benefits from each country’s social security system without combining the periods of work in both countries. Therefore, the court held that there was no reason to apply the totalization agreement and that the exception that carves out totalization agreement payments from the windfall elimination provision did not apply.
Before reaching that conclusion, the court discussed the windfall elimination provision’s legislative objective and wording to determine whether it applied to the taxpayers’ case. It said the provision was enacted to “preserve the progressive nature of the Social Security system by ensuring that . . . [it] does not advantage high-income workers who split their careers between covered and non-covered employment over those who paid Social Security taxes for their entire careers.”86 Further, the judge defined the term “employment” in the windfall elimination provision as “service to an American employer anywhere or service to any employer in America” and confirmed that in that sense, non-covered work cannot be considered employment, so the windfall elimination provision applies. The taxpayers agreed with the purpose of the windfall elimination provision but argued that their work in Canada and Quebec fell within the meaning of employment. Thus, it should be considered covered work based on the provisions of the totalization agreements, so the windfall elimination exception would apply.
As in Vanlerberghe, the Beeler court focused on the legislative purposed of totalization agreements to determine the types of work that qualify as employment and covered work. It concluded that the congressional intent for totalization agreements was to make workers otherwise ineligible for retirement benefits in either party country eligible in at least one after combining the periods of covered and non-covered work. Therefore, if work is considered employment and covered work in a country that is party to a totalization agreement, that work cannot also be considered covered under the retirement system of the other party country. In this case, the work treated as covered work in the United States was not covered by the Canadian retirement system and vice versa, so the periods when the taxpayers worked in Canada and Quebec should be treated as periods of non-covered work under the windfall elimination provision. The result was that the taxpayers’ U.S. benefits were reduced.
Underlying the court’s interpretation is the idea that the taxpayers were trying to misinterpret the purpose of totalization agreements to permit workers to become qualified for larger benefits from the social security systems of both countries party to a totalization agreement. However, as the court stated, coverage by one country’s system precludes coverage by the other’s; the windfall elimination provision precludes “otherwise unfairly advantaged workers from drawing two pensions in exchange for one career’s worth of social security taxes.”
When workers contribute to retirement systems in two or more countries, they may hope to receive benefits from more than one. That is unlikely to be the case — at least, not for full benefits from both. Congress generally reduces the benefits the U.S. government pays through the windfall elimination provision that applies to all U.S. beneficiaries to ensure they do not unfairly benefit from Social Security. Despite the existence of a totalization agreement between countries, that general rule is not changed except when the United States pays only a portion of a worker’s benefits. In that limited instance, courts forgo applying the windfall elimination provision.
That understanding of the interaction between totalization agreements and the windfall elimination provision makes sense from a purposive interpretation of both provisions. Even so, litigation has continued as taxpayers seek to apply the exception to the windfall elimination provision in ways that were not intended. This is a good example of when the statutory purpose of provisions helps in their interpretation and when language that might at first seem ambiguous is made clear if the context is known.
Statutory language out of context is dangerous. It also provides the hope for higher payouts if lawyers can claim a foreign payment is based on citizenship, loosely defined, as in Rabanal.
1 See infra note 33 and accompanying text.
3 42 U.S.C. section 415(a)(7).
4 Rabanal v. Colvin, 987 F. Supp. 2d 1106 (D. Colo. 2013). The court remanded the case to clarify the Spanish pension program and complained about the lack of research by the department and administrative law judges. See Section III.A.1, infra.
5 Beeler v. Berryhill, 381 F. Supp. 3d 991 (S.D. Ind. 2019). See Section III.A.5, infra.
6 Office of Management and Budget, “Historical Tables: Table 2.2 — Percentage Composition of Receipts by Source: 1934-2025.”
7 Although Social Security is expected to be fully funded by targeted tax revenues, Medicare has four parts, and FICA only partially funds Part A.
8 Totalization agreements also apply to OASDI if the non-U.S. country has a comparable program.
9 David Kamin and Isaac Shapiro, “Studies Shed New Light on Effect of Administration’s Tax Cuts,” Center on Budget and Policy Priorities (Sept. 13, 2004). The Urban-Brookings Tax Policy Center found that in 2010, the 60 to 90 percent income brackets had an effective payroll tax of 10.2 percent and the top 0.1 percent’s rate was 0.9 percent. Tax Policy Center, “T11-0099 — Baseline Tables: Effective Tax Rates by Cash Income Percentile” (May 18, 2011) (last visited Aug. 30, 2020).
10 Allison Christians, “Taxing the Global Worker: Three Spheres of International Social Security Coordination,” 26 Va. Tax Rev. 94 (2006).
12 Stephanie Hunter McMahon, Principles of Tax Policy 504 (2018).
16 Social Security Protection Act of 2004, section 419(c).
17 Because Social Security caps the amount of earnings subject to tax, the tax is imposed on almost all the income of most low- and middle-income taxpayers but a much smaller proportion of high-income taxpayers’ income.
21 Labor Department Bureau of Labor Statistics, “Foreign-Born Workers: Labor Force Characteristics — 2019,” USDL-20-0922 (May 15, 2020).
22 Christians, supra note 10, at 97.
23 Id. at 94-96.
24 For example, the multilateral Vienna Convention on Diplomatic Relations, the multilateral Vienna Convention on Consular Relations, or bilateral consular conventions. IRS, “Aliens Employed in the U.S. — Social Security Taxes” (last visited Aug. 30, 2020).
25 For example, residents of Canada and Mexico who enter the United States, often to perform transportation services, are exempt from the U.S. payroll taxes.
29 20 C.F.R. section 404.460. See also Christians, supra note 10, at
30 For more on the tax treatment of undocumented workers, see Luz Arévalo, “Who Said Your Immigrant Client Cannot Get Credit for Social Security Payments?” 19 Bender’s Immigr. Bull. 1181 (2014); Stephen Goss et al., “Effects of Unauthorized Immigration on the Actuarial Status of the Social Security Trust Funds,” Social Security Administration (2013); and Francine J. Lipman, “Taxing Undocumented Immigrants: Separate, Unequal, and Without Representation,” 59 Tax Law. 813 (2006).
31 For more on the impact marriage has on the labor supply, see Shinichi Nishiyama, “The Joint Labor Supply Decision of Married Couples and the Social Security Pension System,” Mich. Retirement Res. Ctr. Working Paper WP 2010-229 (2010).
32 See U.S. Model Income Tax Convention of 2016, articles 17-18. For more on the discussion of applicable income tax treaties, see Christians, supra note 10, at 106-108.
33 Social Security Amendments of 1983; and 42 U.S.C. section 415(a)(7). For more on the windfall elimination provision, see Congressional Research Service, “Social Security: The Windfall Elimination Provision (WEP),” 98-35 (last updated Feb. 10, 2020).
34 H.R. 98-47 (1983), at 120.
36 See Social Security Administration, “Research, Statistics & Policy Analysis, Windfall Elimination Provision” (Nov. 2015) (last visited Aug. 30, 2020).
38 For the government’s description of the formula, see Social Security Administration, Program Operations Manual System, “RS 00605.362 Windfall Elimination Provision (WEP) Exceptions” (Nov. 1, 2019).
39 The windfall elimination provision also applies to disability benefits, and if a worker receives a disability pension from non-covered work, that pension might reduce OASDI benefits. See 42 U.S.C. section 415(a)(7)(B), (d)(3)(B).
40 H.R. 98-25 (1983), at 22.
41 Newton v. Shalala, 874 F. Supp. 296 (D. Ore. 1994), aff’d sub nom. 70 F.3d 1114 (9th Cir. 1995); and Vanlerberghe v. Apfel, 82 F. Supp. 2d 1212 (D. Kan. 2000).
42 42 U.S.C. section 415; Social Security Administration, “Computing Primary Insurance Amounts Rules”; 20 C.F.R. section 404.213(a)(3).
43 For the government’s description of totalization agreements, see Social Security Administration, supra note 2; 42 U.S.C. section 433.
44 Beeler, 381 F. Supp. 3d at 997, 998.
50 Christians, supra note 10, at 90-91.
51 42 U.S.C. section 433(e)(2). See also Christians, supra note 10, at 91.
52 Id. at 87.
53 See Jeffrey L. Dunoff, Steven R. Ratner, and David Wippman, International Law: Norms, Actors, Process: A Problem-Oriented Approach 215-225 (2015); and Joel D. Kuntz and Robert J. Peroni, U.S. International Taxation, para. C4.03 (2020).
54 Dunoff, Ratner, and Wippman, supra note 53, at 226-233. Each totalization agreement includes an article on denunciation. Usually the agreement “shall remain in force and effect until the expiration of one calendar year following the year in which written notice of its denunciation is given by one of the Contracting States to the other Contracting State.” The U.S. denunciation procedure for totalization agreements is the same as for the adoption of the agreement, with executive initiation and congressional approval after 60 days.
55 Vienna Convention on the Law of Treaties, article 2 (May 23, 1969); and Christians, supra note 10, at 87.
56 Yuji Iwasawa, “The Doctrine of Self-Executing Treaties in the United States: A Critical Analysis,” 26 Va. J. Int’l L. 627, 676-677 (1986).
57 Christians, supra note 10, at 90-91. See also Beeler, 381 F. Supp. 3d at 998-999.
58 Christians, supra note 10, at 87.
59 Id.; Cym Lowell and Mark Martin, U.S. International Taxation, para. 9.01 (2020); and Kuntz and Peroni, supra note 53, at para. C4.01.
60 IRS, “United States Income Tax Treaties — A to Z” (last visited Aug. 30, 2020); Social Security Administration, supra note 2; and Kuntz and Peroni, supra note 53, at para. C4.02. With some countries, the United States has income tax treaties but not a totalization agreement. For example, the United States has an income tax treaty but no totalization agreement with Russia. The totalization agreement with Canada is the only one that has no provision regarding disagreements or disputes at all.
61 Jackson and Cash, supra note 47.
62 Friendship, Commerce, and Navigation treaties provided that each party country treats nationals of the other country as it treats its own nationals in the entitlement to and payment of social security benefits. However, the provisions were too general and lacked sufficient clarity to protect the benefit rights of U.S. expatriate workers. National treatment was different in every country and different from U.S. treatment, and U.S. citizens working abroad sometimes had to pay double social security taxes on the same earnings and experienced bad legal treatment. Id.
64 42 U.S.C. section 433.
65 See Social Security Administration, supra note 2.
67 Rev. Proc. 80-56, 1980-50 IRB 21; Rev. Proc. 84-54, 1984-28 IRB 11; and Rev. Rul. 92-9, 1992-6 IRB 9.
68 Social Security Administration, supra note 2.
70 For procedural requirements, see IRS, “Totalization Agreements: Federal, State, Local Governments,” supra note 45.
71 See Section III, infra.
72 See also Perez v. Colvin, 2016 WL 3566943 (N.D. Cal. 2016) (basing benefits reduction on windfall elimination provision; the totalization agreement exception cannot apply because the United States does not have a totalization agreement with the Philippines).
73 42 U.S.C. section 415(a)(7)(A).
74 20 C.F.R. section 404.213(a)(3).
75 In Beeler, F. Supp. 3d at 1005, the court challenged Rabanal’s strict reading of the statutory provisions regarding whether the benefits paid based on citizenship and earnings are to be excluded from the windfall elimination provision.
76 Eshel, 831 F.3d 512.
77 See also Erlich, 104 Fed. Cl. 12 (examining the definition of the taxes covered by the totalization agreement).
78 Robson v. Berryhill, 707 F. App’x 441 (9th Cir. 2017), aff’g 2016 WL 4678080 (N.D. Cal. 2016). Few opinions have been issued in this area, with most previous cases resolved in nonprecedential ways. Administrative law judge decisions are not binding on courts even if given deference. Further, because not all those decisions are published, it can be difficult to discern the development in the law.
79 Newton, 874 F. Supp. 296.
80 Vanlerberghe, F. Supp. 2d 1212. See also Christians, supra note 10, at 104, 105.
81 H.R. 98-25 (1983), at 22.
82 See also Whiteside v. Secretary of Health & Human Services, 834 F.2d 1289, 1292 (6th Cir. 1987).
83 Hawrelak v. Colvin, 667 F. App’x 161 (7th Cir. 2016), cert. denied, 137 S.Ct. 2194 (2017).
84 Kamyk v. Berryhill, 695 Fed. App’x 947 (2017), aff’g 2016 WL 4798955.
85 Beeler, 381 F. Supp. 3d 991.
86 Id. at 995, citing Hawrelak, 667 F. App’x at 162.