All NRIs living in the US will be familiar with the Social Security program as one of the primary sources of retirement income. Social Security is a US federal government program that employers and workers fund with current income in the expectation of receiving future income from the government upon retirement, disability or death. Depending on your situation, these funds may be paid to you, your spouse or your dependent children or parents.
Payments into the social security fund are mandatory for all US workers. Given the strict eligibility requirements to receive funds, many NRIs pay into the fund without certainty of payout. According to the Economic Times, the Indian government estimates that Indian professionals have paid more than $25 billion toward the Social Security fund over the past decade, money which cannot be recouped through the program if the NRI returns to India without establishing eligibility.
Below we discuss the funding of the Social Security program, detailing the residency and eligibility rules and implications for NRIs.
Social Security Funding
Social security is a mandatory program for all employees in the US. Whether citizens, residents or H1B visa holders, workers must pay social security taxes on their income. For 2019, the social security tax rate is 12.4%, divided evenly between employee and employer.
On behalf of each worker, the employer contributes an amount equivalent to 6.2% of their gross salary, up to the $132,900 salary limit, to the Social Security Trust Fund. Employees also pay 6.2% to the same fund, which the employer deducts directly from their paychecks.
The below table shows Social Security contributions at various levels of income.
Although these monies are deposited in a trust, these funds are not specifically earmarked for each employee’s retirement. Rather, these funds are paid out to current recipients, such as qualified retirees, people with disabilities, and surviving spouses and children of deceased workers.
When it comes time for current workers to receive social security upon their retirement at age 62 or later, their payments will come from workers paying into the Social Security trust fund at that time.
Eligibility for Social Security
For each year of employment, workers accrue credits towards Social Security eligibility. A minimum of 40 Social Security credits must be accrued to be eligible for retirement benefits. Under the current policy, an individual receives one credit for income of $1,360, with a maximum of four credits allowed per year. With only 4 credits allowed per year, a worker must work for 10 years, with a minimum annual income of $5,440 in order to obtain the 40 credits required for full eligibility for Social Security.
NRIs who work for less than ten years or receive less than 40 credits will be ineligible to receive retirement payments through Social Security. For those workers, previous credits will be recorded and can be added to should they decide to resume qualifying work.
Social Security also allows for payment of benefits to dependent and survivors, as long as they themselves lived in the US for a minimum of five years, including:
- Widow or widower, at age 60 or older
- Disabled widow or widower, age 50 or older
- Widow or widower, any age, caring for a child under age 1
- A child under age 18
- A disabled child of any age
- Dependent parents, age 62 or older
Social Security is only one expected source of retirement income, along with savings and investment. Although the official age to receive full retirement benefits is 67, workers can start receiving Social Security from the age of 62 onwards, albeit on a reduced basis. Workers who retire at age 62 receive approximately 30% less in benefits than those who wait until age 67. For workers who defer their retirement beyond age 67 and wait till age 70, benefits go up by 8%.
The amount received in Social Security payments by an individual is contingent on lifetime earnings, so the greater the funds contributed to the system, the higher the Social Security payments will be. The actual monthly payment amounts are based on a formula which takes into account the highest 35 years of earnings.
According to the Social Security Administration, for those who start their retirement payments at age 67, Social Security will pay an amount approximately equal to 75% of wages for low earners, 40% for medium earners, and 27% for high earners.
Within the US
NRIs may receive Social Security payments as long as they have lived in the US for at least ten years, earned the 40 credits required for eligibility, and are age 62 or older. Payments can be received by check or directly deposited into a US financial institution.
Outside of the US
NRIs who choose to return to India for retirement may still have their Social Security payments deposited in India under the following conditions:
- Benefits commence at age 62 or later
- Benefits are based on amounts earned and contributed to Social Security
- They earned at least 40 credits under the U.S. Social Security system OR lived at least 10 years in the US
- Payments may be directly deposited to a US financial institution or to any bank in India with an international direct deposit agreement
In order for dependents and survivors of NRIs to receive Social Security payments outside the US, they must demonstrate the following:
- They are the dependent or survivor of a worker who earned at least 40 credits under the Social Security system OR worker who lived at least 10 years in the US
- In addition dependents and survivors must have themselves lived in the US for 5 years in the same relationship under which benefits are based. This means that if you are receiving benefits as a spouse of a previously retired and now deceased worker, you can only count the five year US residency requirement after date of legal marriage.
Anyone receiving Social Security income, regardless of residence, must file US federal taxes, irrespective of whether they meet the eligible threshold for taxation. As such, NRIs that choose to retire in India and receive Social Security payments must file taxes in the US.
For singles, 50% of Social Security income between $25,000 and $34,000 is taxed at the prevailing tax rate while 85% of income over $34,000 is taxed.
For married individuals who file jointly, 50% of Social Security income between $32,000 and $44,000 is taxed at the prevailing tax rate while 85% of income over $44,000 is taxed.
NRIs who work in the US all pay into the Social Security system. Effective financial planning requires them to consider whether those funds will be available to them or their dependents or survivors. As they consider their careers and future retirement, it’s critical to understand residency requirements, minimum payment amounts, and tax implications in order to assess whether Social Security funds will be available for them in retirement, especially if they choose to return to India for their golden years.