Cost estimates for a totalization agreement
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COST ESTIMATES FOR A TOTALIZATION AGREEMENT. CHRIS CHAPLAIN SOCIAL SECURITY ADMINISTRATION OFFICE OF THE CHIEF ACTUARY May 23, 2007. What is a totalization agreement?. Bilateral agreement between the U.S. and a foreign country

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Cost estimates for a totalization agreement l.jpg

COST ESTIMATES FOR A TOTALIZATION AGREEMENT

CHRIS CHAPLAIN

SOCIAL SECURITY ADMINISTRATION

OFFICE OF THE CHIEF ACTUARY

May 23, 2007


What is a totalization agreement l.jpg
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


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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


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Reduction in U.S. Social Security tax contributions: the Chief Actuary

  • 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


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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


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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


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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…


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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


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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


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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


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Added Social Security benefit payments by foreign program: 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


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Added Social Security benefit payments by foreign program: 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


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Added Social Security benefit payments by foreign program: 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


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Long-range estimates program:

  • 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.


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