The general principle of all totalisation agreements is that a worker, if equal, must pay taxes and should only be covered by the social security system of the country in which he works. This simple rule is called the territorial rule, that is, the territory in which a person works determines his or her tax debt. All other coverage provisions for totalization agreements are exceptions to this general rule. Totalization agreements are popular with U.S. companies because they exempt employers from paying a dual social security tax. According to a regular study of net tax savings by the Office of International Programs of the Social Security Administration (SSA), U.S. companies and their employees save about $1.5 billion a year in foreign social taxes based on these agreements. These tax savings help make U.S. operations more profitable around the world, while improving the competitiveness of U.S. trade. The totalization agreements also excuse foreign workers temporarily sent to the United States for payment of U.S. Social Security taxes. The result is annual savings of approximately $500 million for the foreign workers involved and their employers.
These tax savings make the United States a more attractive destination for foreign capital, thereby encouraging foreign direct investment. Suppose a worker born on January 2, 1951 applied for an old-age pension in January 2017. The worker worked in the United States for 8 years – from 1980 to 1987 – and earned the maximum amount of taxes subject to Social Security each year. As a result, the worker has accumulated 32 QCs, which is not enough to qualify for a superannuation only with U.S. coverage. However, this worker also covered in Switzerland. Since the United States and Switzerland have a totalization agreement and the worker has at least 6 QCs, it can be attributed to the worker`s Swiss coverage that he or she can benefit from a fully beneficiary benefit. The U.S. worker`s benefit is calculated in the steps described below. The goal of all U.S. totalization agreements is to eliminate dual social security and taxation, while maintaining coverage for as many workers as possible under the country where they are likely to have the most ties, both at work and after retirement.
Any agreement aims to achieve this objective through a series of objective rules. Most U.S. agreements eliminate dual coverage of autonomy by allocating coverage to the worker`s country of residence. For example, under the US-Swedish agreement, an American citizen living in Sweden and living in Sweden is covered only by the Swedish system and is excluded from US coverage. In recent years, attempts have been made to advance legislative proposals to amend Section 233 to broaden the scope of totalization to the benefit of U.S. interests, while maintaining the program`s traditional focus on actuarial balance and fiscal prudence.