Events 2007

U.S. Social Security Totalization Agreements and the proposed U.S.-Czech Agreement

Frequently Asked Questions (FAQs)
 

1) What is a totalization agreement?  Why are these agreements desirable?

Totalization agreements are a means of protecting the benefit rights of workers who divide their working career between two or more countries.  They also help to eliminate situations in which workers or employers are required to pay Social Security taxes to two countries on the same earnings.  In addition, totalization agreements remove legal obstacles that prevent a person who has earned benefits in one country from receiving those benefits while residing in the other country.

The United States currently has totalization agreements in force with 21 countries: Australia, Austria, Belgium, Canada, Chile, Finland, France, Germany, Greece, Ireland, Italy, Japan, Korea (South), Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

Totalization agreements allow for more equitable treatment of workers and employers on a reciprocal basis.  The prospect of double Social Security taxation and serious gaps in a worker's Social Security record can act as disincentives for employers to assign workers where they are needed most and for employees to accept such assignments.  The Social Security agreement with the Czech Republic would remove these obstacles.

2) What would be the benefits of the totalization agreement with the Czech Republic? 

Benefits for U.S. workers?  Benefits for Czech workers?  Would survivors and dependents also be affected by an agreement?

Totalization agreements are designed to coordinate Social Security taxation and benefits for people who divide their careers between the United States and another country.

Without an agreement, a worker from one country who works in the other country may be required to pay Social Security taxes to both countries on the same earnings.  The employer may likewise have to pay to both countries.  Like earlier U.S. agreements, the agreements with the Czech Republic would eliminate this dual Social Security taxation by assigning a worker's Social Security coverage to just one country. 

Currently, U.S. citizens who are employed in the Czech Republic for even very short periods by U.S. companies must pay U.S. Social Security taxes as well as Czech Social Security taxes, along with their employers.  Under the agreement, employees who are sent from the United States to work in the Czech Republic temporarily (5 years or less is considered temporary under the proposed U.S.-Czech agreement) could be exempted from Czech Social Security tax, and would pay only into the U.S. Social Security system.

Employees who are working in a country with which we have a totalization agreement and in which they were hired or who have been assigned to a country on a permanent basis (more than 5 years) would be covered only by the country in which they are working.
The proposed agreement with The Czech Republic would also fill gaps in benefit protection for workers who have divided their careers between the United States and the Czech Republic.  Such workers may fail to qualify for Social Security benefits from one or both countries because they have not worked long enough to meet minimum eligibility requirements.  An agreement would allow each country to count a worker's Social Security credits in the other country when determining benefit eligibility.  Benefits would then be paid on a prorated basis.

An agreement would not only allow each country to consider a worker's combined U.S. and Czech coverage periods to establish entitlement to retirement or disability benefits for the worker; it would also allow the countries to determine benefit entitlement for a worker's dependents and survivors based on the worker's combined coverage. 

In addition, it would remove restrictions that either country imposes on benefit payments to workers and their dependents and survivors when they live in the other country.  The United States, for example, currently will not pay dependent and survivor benefits to Czech citizens who have been outside the U.S. for more than 6 months unless they previously resided in the U.S. for at least 5 years during which they were related to the worker.  This requirement would no longer apply once an agreement entered into force.

3) How would agreements benefit employers in each country?

The proposed agreement would help employers avoid situations in which they have to pay Social Security employment taxes to both the United States and the Czech Republic for their employees.  This can happen now, for example, when a U.S. company assigns a U.S. citizen or a U.S. resident alien to work temporarily in the Czech Republic.  Under the agreement, if the employee were hired in the United States and assigned only temporarily to the Czech Republic, the employer and employee would pay Social Security taxes only to the United States.  On the other hand, employees who were hired locally in the Czech Republic or sent there for a long-term or permanent assignment would be covered under the Czech system only.

In addition, an agreement would indirectly help employers save substantial amounts in income tax when they send employees from one country to the other.  It is a common practice for employers to reimburse employees for any additional income or employment taxes they are required to pay as a result of their foreign assignments.  These tax reimbursements are frequently considered to be taxable income in the host country.  When the employer reimburses the additional income tax that results, his tax bill can pyramid significantly.  By exempting employees on temporary assignments from host country Social Security taxes, the agreement would also relieve their employers from the host country income tax they would otherwise have to pay.
 
4) How much would this cost and how many people would be affected by the proposed agreement?

Every Totalization agreement has a cost for each country because it results in additional benefit payments based on combined credits and the elimination of benefit payment restrictions for people residing in the other country, and also because of the elimination of dual Social Security taxes.

The law requires that before an agreement can enter into force, the President must send it to Congress for a 60-session-day review period together with a report on the estimated cost of the agreement and the number of people it will affect.
 
The estimated costs for the United States and the Czech Republic are displayed in the following table. 

Estimated Additional Costs to the U.S. and Czech Social Security Systems under the Proposed Totalization Agreement

	Fifth Year (in Millions)	Years 1 – 5 (cumulative) (in Millions)
Financial Effects for the U.S. Social Security system:
Increase in OASDI benefit payments	$3	$9
Reduction in OASDHI tax contributions	4	15
TOTAL	7	24
Financial Effects for the Social Security system of The Czech Republic:
Increase in Czech OASDI benefit payments	$5	$13
Reduction in Czech OASDI and health insurance tax and other contributions	19	84
TOTAL	24	97

 
5) Does the Social Security Administration currently pay benefits to anyone in the Czech Republic?

Yes.

Section 202(t) of the Social Security Act authorizes the payment of benefits to non-U.S. citizens if they are citizens of a country that has a Social Security system that pays benefits to U.S. citizens anywhere in the world without restriction.  Since the Czech Republic pays social security benefits to U.S. citizens residing outside of the Czech Republic, SSA already pays Social Security benefits to Czech citizens anywhere in the world without restriction.

Section 202(t) also dictates that we pay non-citizen dependents and survivors if the beneficiaries maintained at least 5 years of U.S. residency during the period when they were related to the insured worker. 

The combination of these statutory provisions has resulted in the following numbers of individuals living in the Czech Republic who are in current pay status:

In July 2007, SSA paid a total of $565,033.60 to 666 beneficiaries in the Czech Republic.  There are also 65 beneficiaries in the Czech Republic whose benefits have been suspended.  Of the total beneficiaries (those receiving benefits and those in suspense status) 561 are U.S. citizens.  Here is a summary of the payments issued by benefit type:

• 491 payments to retired workers ($435,865)
• 41 payments to disabled workers ($39,248)
• 26 payments to spouses  ($11,171)
• 32 payments for children  ($16,935)
• 76 payments to surviving spouses ($61,811)

6) When would the agreements be effective?

The proposed agreement specifies when it will enter into force.  This would be 3 months after the two sides have completed their respective legislative review procedure.  Barring any unforeseen delays, we believe the agreement could become effective in late 2008.
 
7) Will the U.S. Congress and the Czech Parliament have to approve the agreements?  How long will that take?

Once the proposed agreement is signed, it will be transmitted to Congress for review.  An agreement must lie before Congress for 60 session days.  How long this would take can vary depending on the frequency of days that Congress is in session.  However, based on experience with other agreements, it takes about 5 months to complete the review.  The Czech authorities will likewise submit the agreement to the Czech Parliament for review.  After the U.S. and the Czech Republic have completed their review requirements, we would then exchange diplomatic notes saying we have completed our legal requirements and are prepared to implement the agreement.  The agreement would then become effective on the first day of the third month following the month we exchange diplomatic notes.
 
8) The U.S. has had this kind of agreement in place with most of Western Europe for years.  Why has it taken so long to get an agreement with the Czech Republic?

For many years, Czech authorities indicated that legal and policy obstacles, specifically the potential cost for the Czech Republic, would prevent them from concluding a totalization agreement with the United States.  Now, however, the deepening ties between the two countries clearly underscore the need for this agreement.
 
9) Does totalization affect Medicare eligibility?

Under U.S. law, a person generally becomes eligible for free Medicare hospital insurance if the person is age 65 or older and is eligible for monthly Social Security benefits or is under age 65 and has been entitled to disability benefits for more than 24 months.  Generally, U.S. Medicare provides coverage for medical expenses incurred in the United States only.

An agreement with the Czech Republic would not include any provision affecting these requirements.  Although a person could become eligible for monthly Social Security benefits from the United States based on combined U.S. and Czech coverage, eligibility for a benefit based on combined coverage could not be used to qualify for Medicare hospital insurance.

On the other hand, an agreement would apply to the portion of the U.S. Social Security tax that finances Medicare hospital insurance.  Thus, workers and employers who are exempt from U.S. Social Security tax based on the agreement can be exempt from the entire tax, including the Medicare portion.

10) If the United States enters into a totalization agreement with the Czech Republic, what would the minimum work credit requirements be to receive either a partial totalized retirement benefit under an agreement or a full U.S. retirement benefit?

To receive a partial totalized benefit under all of our agreements, an individual must have accumulated at least 6 quarters of U.S. coverage and must have at least 40 quarters (10 years) of cumulative coverage between the countries with which we have an agreement.

For example, if an individual does not have the required 10 years’ coverage in the U.S. Social Security system to qualify for retirement benefits, the individual’s combined work in both the United States and the other country must yield 10 years of coverage.  However, the amount payable would be a "pro-rated benefit."

To receive a full social security retirement benefit, the individual must have at least 40 quarters of U.S. coverage.  If this is the case, a totalization agreement would have no impact on the benefits paid to the worker by SSA.

Additional Information
When a worker qualifies for benefits based on combined coverage, the amount payable is a "prorated benefit," i.e., one that is proportional to the number of credits earned in the United States.

Totalization agreements can also be used to meet insured status requirements for U.S. disability and survivors benefits, which in some cases can be fewer than 40 quarters.

11) What are the prospects for totalization agreements with other countries?

SSA has sought to focus its totalization agreements program on agreements that will benefit the greatest number of U.S. citizens and employers.  Over the past 30 years, the United States has negotiated agreements with nearly all the countries of Western Europe, as well as Canada.  Over that period, however, countries in other parts of the world, including Latin America, Eastern Europe and Asia, have become increasingly important trading partners for the United States.  With increases in U.S. business operations in countries outside the North Atlantic region, we believe that totalization agreements with these countries will become more desirable.

Agreements with Australia, Chile, Japan and South Korea have all been implemented over the past five years.

A proposed new agreement with Poland may be ready for signing end this year, and we are in the process of starting discussions on a new agreement with Hungary.