This is the last of my series on account types that Americans in the UK might use to save for retirement. US Social Security and the UK State Pension maybe aren’t accounts, strictly speaking, but they’re certainly worth understanding and considering how you’ll use them in your planning.
I’ll start with an overview and comparison of the two systems, then a few notes on how the systems can interact, both to your advantage and disadvantage. I’ll wrap up with some quick thoughts on how Social Security benefits get calculated and how to be most efficient, and on long-term futures for these programs.
For the purposes of this post, I’m using values that make sense for somebody who hasn’t retired yet, and is in their 30s or 40s. There might be slight differences depending on age – the biggest one would be that there’s a different UK state pension system if you’re born before 1951 (men) or 1953 (women) – I’m not even going to touch on that system.
I’m also only going to discuss retirement benefits, not disability, blindness, etc.
These are both fairly complicated systems – this is just a high-level overview, and there’s a ton of nuance and specifics. I might do future posts on some of the details, if there’s interest.
Overview & Comparison
|Attribute||US Social Security||UK State Pension|
|How do you qualify?||40 work credits – typically 4 per year of employment, so 10 years of working and paying Social Security tax||10 qualifying years on your National Insurance record (not necessarily in a row – typically from working, credits for unemployment or parenting, or paying voluntary contributions)|
|When can you get it?||62 at the earliest, for a reduced amount. 67 is “full”||68 (if you were born after 06 April 1978, somewhat earlier if before)|
|How much do you get?||Based on your highest 35 years of eligible Social Security earnings (typically not including foreign earnings where you aren’t paying Social Security tax) and when you choose to start getting paid (between age 62 and 70, the longer you wait the more you get)|
At 67 (full retirement age), the benefit replaces roughly 75% of your income for very low earners, about 40% for medium earners, and about 27% for very high earners.
|Based on how many qualifying years you have – maximum benefit at 35 qualifying years.|
Straight proportion of the full benefit – e.g. if you have 20 qualifying years, you get the (full benefit divided by 35 years) x 20 qualifying years. That is, (£175,20/35)*20 = £100.11
Does not depend on your income
|What’s the maximum benefit (2021)?||Age 62: $2,324/month|
Age 67: $3,113/month
Age 70: $3,895/month
These assume that you’ve maxed out your earnings for 35 years – the max is $142,800 in 2021, indexed for inflation (anything above that level doesn’t have SS tax taken out and is ignored for SS calculations)
|Full benefit is £175.20/week – this can be increased by delaying claiming the pension, which increases it by 1% for every 9 weeks you defer (about 5.8% a year)|
Example: if you defer to age 70, you could increase £175.20/wk to about £196/wk (plus any inflation adjustments in those 2 years).
For comparison, full benefit is about £761 per month – $1,053 at today’s exchange rate. State pension is potentially much less money than social security, if you have a moderate to high US earning record.
|What’s a typical benefit (2021)?||Estimated average of about $1,543 a month.|
For somebody who averaged $60,000/year over a 35 year career, it’s about $2,178.
To get to about the same $1,053 monthly benefit as the UK state pension, you’d need to average about $18,000 per year (or a higher value for fewer years).
|As long as you’ve achieved the full 35 qualifying years, you get the full benefit of £175.20/week (about $1,053/month).|
|Can your spouse benefit?||Yes – typically up to half of your benefit (or their own benefit, if that’s higher from their employment history). This typically includes foreign spouses and divorced spouses if you were married for 10 years and they haven’t remarried.||Typically not, under the new (2016) rules. There are some legacy rules that don’t apply moving forward, but could still affect some people. |
Your spouse would need to qualify based on their own National Insurance record.
|Can your widow/widower benefit?||Yes – can take some benefits from both their own and their deceased spouses benefits||Typically not, under the new (2016) rules. There are some legacy rules that don’t apply moving forward, but could still affect some people.|
|Can you keep working?||Yes, but benefits are be reduced depending how much you earn over the annual limit (reduced by $1 for every $2 over $18,960 while under 67, reduced by $1 for every $3 over $50,520 in the months before your birthday of the year you turn 67). Once you turn 67, there’s no reduction.||Yes, with no penalties. You can defer claiming state pension to allow the benefit to increase.|
|Are your benefits taxable?||Yes – but for Americans in the UK, they will only be taxed by the UK due to the tax treaty||Yes, they are treated as earned income by the UK and the US (probably no US tax due, because of Foreign Tax Credits).|
|How much is the tax while working?||6.2% from you, 6.2% from your employer (if you’re self employed, you pay both), up to the maximum taxable income ($142,800 in 2021)||While employed, National Insurance is 12% from £797 to £4,189 a month, and 2% above that.|
If self employed, you also pay National Insurance – the amount depends on your profits
You can choose to pay voluntary contributions if you’re not working/self-employed
|Does my work in the other country count?||Generally no – you won’t be paying Social Security tax, earning SS credits, or building up SS earnings for UK employment.|
If you’re self-employed and still paying Social Security tax, this will count.
If you wouldn’t otherwise have enough SS credits to qualify, you can get UK credits to count, so you get to your 40 total credits (10 years of work). This reduces your benefit but lets you get something.
|Only to get you to the minimum 10 years to qualify – the benefits will be prorated based on your time in the UK. For example, if you have 7 years in the UK but 10 in the US, the UK will count 3 of the US years to allow you to qualify. But, you’ll only get 7/35 (20%) of the full amount of £175.20/week|
Interactions between Social Security & State Pension
Quick answer to the most common question: yes, you can get paid by both Social Security and the State Pension! But, the devil is in the details…
There are two main ways Social Security & the State pension can interact: Totalization and the Windfall Elimination Provision.
Totalization is briefly mentioned in the last line of the table above – basically, if you’re short of the 10 years you need to qualify for either system, but have enough years in the other system to get to a total of 10, you’ll be treated as eligible (at a prorated benefit – you only get paid for the years you’re actually paying into the system or getting credits).
The most likely scenarios for this are if you left the US early in your career and then stayed in the UK permanently, or if you only stayed in the UK temporarily.
As a quick example of working in the relevant country for 9 years, and only being 1 year short of qualifying without needing totalization:
- US Social Security: If you come to the US, earn more than the maximum social security income for every year, and then leave, you’d be eligible for about $1,400 per month – pretty substantial! Even at a more common $50,000/year income, you’re looking at about $900 a month. This hopefully won’t be the bulk of your retirement even in the leanest of retirement scenarios, but it can help.
- UK State Pension: the most you could qualify for is 9/35 of the full amount (£175.20/week) – that’s £45/week or about £195 a month. Nice to have, but not the foundation of your retirement!
Obviously these are the most generous cases, since you were only 1 year short – the benefit amounts go down the less you were in the country. But the bottom line is, if you ever paid in to Social Security or the State Pension, and you’ve got a total of 10 years combined between the systems, you should be able to get something out of both of them, even if it isn’t much.
Windfall Elimination Provision
This one only applies to Social Security, there isn’t a corresponding State Pension provision that I’m aware of.
The idea is that, if you’re getting benefits by another retirement system like the UK State Pension, Social Security will reduce your SS benefit, so that you’re not getting a “windfall” due to getting double benefits.
The maximum reduction is half the amount of the monthly pension that is based on work not covered by Social Security – in our case, half the amount of the State Pension that you’re receiving.
WEP doesn’t apply if you have 30 or more years of substantial earnings covered by Social Security – but for many people leaving the US in their early or mid careers, it will apply.
Let’s walk through an example – I’ll use my own numbers here, because I think I’m a reasonably typical example of somebody who leaves the US mid-career and plans on staying in the UK permanently.
This example is based on the official WEP calculator and my estimates for my State Pension. All values are current year – obviously will be much inflated over the decades.
State Pension first: I expect that I’ll have about 15 qualifying years for the State Pension when I retire (early). So my State Pension is 15/35 (42.9%) of the full State Pension. 42.9% * £175.20 = £75.09/week. The SS calculator wants this in monthly dollars; let’s call it $455/month at a $1.40 to the pound.
For reference, I had 12 years of SS earnings, plus a little bit in college. My earnings are all over the place – half that time I was in the Navy, so my social security earnings were relatively low (a good chunk of military pay are non-taxable allowances). There’s a couple years where I maxed out social security earnings. On average, it’s just under $70k a year – fairly typical for an American with a college degree.
When I plug my data into the WEP calculator, it spits out a monthly retirement benefit of $1,083 at age 67. My non-WEP, “normal” benefit would be $1,311 at the same age, so it’s taking out $228 a month due to the WEP – that’s half of the $455/month I’d get for State Pension.
If I delay to 70, it goes up to $1,343, compared to a normal benefit of $1,626. Taken early at 62, it’s $763 instead of $923 – however, WEP won’t apply until I start getting the State Pension, so I’d actually get the $923 until State Pension age at 68.
When I’m closer to taking these two, I’ll do some more detailed math to figure out when it makes sense for both me and my wife to take Social Security and State Pension – lots of variables there.
Bottom line, you’ll still wind up with more money by having both Social Security & State Pension, but you’ll lose out on about half the value of the State Pension by having it taken it out of SS.
Social Security Benefits & Income
The way that Social Security calculates your benefit amount is pretty complicated – it’s easy to Google if you really want to know, or start here from the horse’s mouth. Honestly, just use the calculators on the SS website if you want to play around with the variables.
But, there’s a very important underlying concept – Social Security is a highly progressive program. It helps people with lower lifetime incomes a lot, but as your lifetime income gets higher, it helps proportionally less and less.
The calculation starts with your Average Indexed Monthly Earnings – basically, sum up your top 35 years of earnings, adjusted for inflation, and divide by 420 (35 years x 12 months). Based on your monthly average, your Primary Insurance Amount is calculated – the amount you get at full retirement age (no adjustments for early or late retirement). In 2021 dollars:
- From $0 to $996 of monthly earnings, you get 90% added to your Primary Insurance Amount – up to about $896 a month
- From $996 to $6,002 of monthly earnings, you get 32% added to your PIA – an additional up to $1601 a month
- From $6,002 on up, you get 15% added to your PIA, until you hit the cap (if you’ve maxed out your social security income for 35 years – well done!)
What does that mean for us? There’s a pretty good return on all your income up to $996 AIME – that’s about $418k over 35 years. If you live for 20 years after age 67, you’ll get about $215k in SS benefits but have paid about $26k in SS taxes (8.3x return, albeit with a really long holding period)
But, it doesn’t have to be over 35 years – if you hit that $418k in just 3 years, with each year around the $142,800 maximum earnings cap, you get the same benefit as somebody who make about $12k/year for 35 years (all numbers are a little rough with the inflation calcs – think of them as 2021 numbers). You’d need 7 more years of credits to qualify, of course, but that could be from the UK or very low income.
For a more middle scenario, if you have about $42k of social security wages for 10 years or $84k for 5 years, you’ve maxed out that 90% bracket. If you are able to hit this level before leaving the US, it probably makes sense – you’re getting the biggest bank for your buck.
After the 90% bracket, the return drops dramatically. As a quick example, I plugged 10 years of $42k earnings into the official SS calculator – you get a monthly retirement benefit of $935 (not adjusting for WEP). But double that to 10 years of $84k earnings, and your monthly benefit goes up to $1,294. Double the income (double the work?) for only a 38% increase in benefit. And, if you live for 20 years, you get about $310k, and paid about $52k in SS taxes (down to 6x return).
Depending where you are in life, you may already be in this 32% bracket when you decide to move to the UK. It’s up to you, but once you get out of the 90% bracket, I don’t see this as a factor in timing the move. And especially once you’ve reached the 15% bracket (about $2.5 million in SS eligible lifetime earnings, in 2021 dollars), that extra 15% doesn’t do much for me!
Will Social Security & the State Pension Still Be There?
Without a crystal ball, there’s no way of knowing for sure. But for me, I can’t see them disappearing completely. Far too many people have little to no retirement savings, and having hordes of old people unable to feed and house themselves, especially when they tend to be active voters, doesn’t sound like something that will happen.
I could see one or both of them being means tested, and I could see the benefits amounts being eroded by inflation. Those seem plausible – “tax the fat cats” usually goes down reasonably well, and people don’t notice as much when their checks get bigger, but by less than inflation.
Personally, I include both Social Security and the State Pension in my retirement planning, but I discount both by 50%. That feels reasonable to me, and is close enough for now – if I have some extra money in retirement, I will find ways of spending it, or doing some kind of good with it. Do what lets you trust your planning and sleep at night!