Macroeconomic Effects of Social Security Totalization Agreements
The United States has signed international social security totalization agreements with 30 countries. For persons working in a foreign country during part of their careers, these agreements reduce double taxation on social security burdens and reduce the risk of not qualifying for social security benefits. In this report, we consider the potential of international social security totalization agreements to affect macroeconomic outcomes. We find that these agreements are associated with higher levels of foreign direct investment. The theoretical framework indicates that these treaties can affect firms’ decisions to relocate their activities across borders, but the magnitude and direction of this effect depends on the characteristics of the countries involved. The effects of these agreements are larger when the share of foreign-controlled production is smaller in the host country.
- The United States has signed international social security totalization agreements with 30 countries since 1978. The number of totalization agreements has continued to increase in recent years with almost half of currently active agreements being implemented after the year 2000.
- Totalization agreements make it more attractive for individuals to temporarily work abroad and increase employers’ incentives to invest in the foreign partner country and send their workers there to oversee operations in partner countries.
- The number of workers covered by the agreements has increased as treaties are signed with new partners. Statistics from the Social Security Administration suggest about 64,600 U.S. workers a year are affected by the coverage provisions of these agreements. They move abroad for an average of three years. In 2018,s 237,000 people received a partial totalized benefit under the benefits provision of the agreements.
- The implementation of these agreements is associated with higher flows of foreign direct investment. The evidence is most robust for outflows of U.S. firms investing in foreign countries.
- A theoretical framework, quantified to match the U.S. and partner countries’ economies, predicts that this type of agreement, by decreasing the cost of relocating productive inputs across borders, increases the flows of foreign direct investments. The magnitude and the direction of the net effects depend on the characteristics of the countries involved.
- The effects of totalization agreements depend on the characteristics of the partner country: Larger economies are more complementary to the U.S. in terms of investment opportunities for American investors and workforce composition, while less developed economies provide more opportunities to profit from relative advantages.
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Paper IDWP 2019-407