Pension contributions paid abroad: purchase or totalization

Pensions in the international system: the social security protection of the worker who has paid pension contributions abroad. Redemption or totalization of foreign contributions paid to allow workers who have paid contributions in other countries to retire. Our guide to the international regulations on social security and social security of the worker.

Job mobility has become a feature of our age in all areas of work.

With the globalization of markets and the relocation of companies, more and more workers are finding themselves working for longer or shorter periods abroad.

One aspect that usually influences the choice of a work migration abroad is related to pension provision.

I am referring to the possibility for workers who migrate abroad to combine pension contributions paid in other countries.

I’m sure you’re pondering this too, especially if you’ve just been made a job offer from abroad.

I decided to dedicate this article to explore this crucial topic. The ability to rejoin or total foreign contributions is essential.

You should contact the Italian INPS, but I suggest you read this article from my experience in the field.

 

PENSION CONTRIBUTIONS PAID ABROAD AND THE TERRITORIALITY PRINCIPLE

Carrying out an activity as an employee abroad has tax implications.

These are aspects that I have previously addressed in this contribution: “Lavoro Employment abroad: taxation in Italy.”

The fundamental principle on which the legislation to be applied is based is that of territoriality.

In particular, according to this principle, the law must apply where the work is performed. This is the case regardless of where the worker comes from.

Following this principle in an axiomatic way, the worker residing in Italy would have no incentive to move abroad for work. This is because he would find himself without Italian social security protection.

However, the development of the labor market, both in Europe and globally, has made it possible to overcome, in some cases, the principle of territoriality.

The stipulation of international treaties or agreements in the field of social security and welfare has led to overcoming the principle of territoriality. This was possible with EEC countries and with other countries linked to Italy by shared economic interests.

According to this premise, it is clear that if there were no exceptions to the general principle, the worker residing in Italy would have no particular incentive to cross the national border for work purposes. He would find himself deprived of the protection given to him in loco by the Italian social legislation.

Therefore, Italian workers who, during their working life, have accrued insurance positions with public bodies that manage social security insurance in foreign countries can be facilitated.

In practice, under certain conditions, there is the possibility of obtaining the right to a single pension by using the contributions paid in the various States.

Let’s see how this can be achieved.

 

PENSION CONTRIBUTIONS ABROAD: INTERNATIONAL AGREEMENTS

The possibility of derogating from the principle of territoriality is guaranteed by Community Regulations, as far as the European contracting States are concerned.

Concerning some non-EU countries, this possibility derives from specific bilateral agreements stipulated with them.

These international agreements aim to guarantee migrant workers the same social security and pension protection provided by individual national legislations. In other words, safety is recognized for people who have always worked in the same State.

This is achieved, above all, through the application of the so-called “aggregation of insurance periods” linked to pension contributions paid abroad.

As a rule, in fact, there is no possibility of transferring contributions from one State to another in the international sphere. Neither is it possible to reconcile the various insurance positions (except for a few special agreements).

 

ITALY’S BILATERAL SOCIAL SECURITY AGREEMENTS

Particularly in recent years, the various states have been willing to regulate and harmonize binding social and welfare agreements.

There is no doubt that these agreements aim to meet the needs of labor migration.

The legal instrument used by the various states is the Bilateral Agreements (or treaties) on social security.

The European Commission encourages greater cooperation between the Member States on social security coordination with non-EU countries.

Since the 1970s, Italy has stipulated a series of bilateral agreements with emigration countries to protect the movement of its workers.

They are based on respect for non-discrimination and the guarantee of equal treatment of workers and pensioners in such a way as to coordinate the legislations of the contracting States and to equalize the national territories so that migration does not entail the loss of social security rights.

There are currently social security agreements in force between Italy and the following countries:

• Argentina;
• Australia;
• Brazil;
• Canada;
• Cape Verde;
• Israel;
• Jersey;
• Principality of Monaco;
• Yugoslavia, Bosnia, Macedonia, Serbia, Montenegro;
• United States;
• Tunisia;
• Uruguay;
• Vatican City;

IMPLEMENTATION OF BILATERAL SOCIAL SECURITY AGREEMENTS

In general, these agreements are applicable to nationals of the Contracting States.

However, in Argentina, Canada, San Marino, the United States, Uruguay, and Venezuela, the agreements state that it is unnecessary to be a national of one of the two contracting states. Therefore, in this case, it is sufficient to be subject to the social security systems of both countries.

Benefits provided under these agreements include the following areas of insurance:

• Old age, survivors and disability;
• Occupational accidents and diseases;
• Family allowances;
• Sickness and maternity;

The pension amount is determined by the individual country based on its system for calculating contributions and in proportion to the insurance periods accrued following national regulations.

In general, these agreements govern social security according to the following principles:

• Possibility for foreign citizens to work in Italy while remaining under the jurisdiction of their country of origin in social security. This is an exception to the principle of territoriality of the contribution obligation.
• Guarantee of equal treatment within the host state system in respect of particular benefits. That is, similar treatment applies to pension contributions within the scope of the Agreement. Restrictions on benefits of a welfare nature (i.e., not based on contributions paid) remain.
• Exportability of social security benefits to avoid double taxation. A rule is providing for the taxability of pensions in the country of residence only.
• Further provisions for better coordination of social security systems, inspired by the principles set out by the European Commission.

PENSION CONTRIBUTIONS PAID ABROAD: CONTRIBUTORY AGGREGATION

Through the aggregation of insurance periods, the worker can perfect the right to the various social security benefits provided for in the multiple States covered by the agreement. This is done by using contribution periods completed in another foreign state (in the case of simple totalization) or other contracting states (in multiple totalization).

Through the totalization of contributions, workers can enhance the value of contributions credited in foreign countries.

Periods of insurance, employment, self-employment, or residence completed in a State party to the Agreement may be added to those achieved in another Member State.

This is to the extent necessary to obtain the pension. However, provided that these periods do not overlap and that, within the State granting the pension, the credited contributions are more significant than one year.

PRINCIPLE OF TERRITORIALITY AND AGGREGATION OF CONTRIBUTIONS

The principle of territoriality provides that the worker transferred abroad must be registered with the Institutes and Social Security and Welfare Institutions of the foreign country where he works.

This implies that the worker, in some cases, especially if he or she is an itinerant worker, may never reach the minimum pension requirement in any state.

This is because the pension contributions paid are insufficient.

To facilitate the itinerant worker, international agreements provide for certain exceptions to the principle of territoriality.

Exceptions, such as the posting of the worker or the extension of the redemption, periods during which the worker remains registered with the original institutions.

Or the criterion of aggregation of insurance periods. This criterion consists of fictitiously taking into account periods of work carried out in other states, which, by themselves, would not give rise to any benefit. Through aggregation, insurance periods are added together in a fictitious way.

In this way, unlike the institutions of transfer and reconciliation, pension contributions remain acquired in the foreign institutions and bodies where they were paid at the time.

AGGREGATION OF MINIMUM PENSION CONTRIBUTIONS

To proceed with the aggregation of contributions, it is indispensable that the worker has completed periods of insurance in the Contracting States to the Agreement.

Through the totalization of contributions, the worker has the right to add the contributions accrued by the foreign social security system with those present in the social security system of the other contracting State.

Each treaty or agreement regulates the different duration of periods for which aggregation of insurance periods is possible.

More precisely, it is planned:

• A minimum period of 52 weeks for countries to which E.U. regulations apply (E.U. countries, EEA and Switzerland) as well as for Argentina, Australia, Republic of Cape Verde, Croatia, Republic of San Marino, United States of America, Tunisia, Turkey, Vatican, Venezuela;
• A minimum period of 1 week for Brazil, Jersey, and the Channel Islands, Uruguay, Bosnia and Herzegovina, Serbia-Montenegro, and Macedonia;
• Finally, a minimum period of 53 weeks for Canada – Quebec, and Monaco.

SOCIAL SECURITY CONTRIBUTIONS USEFUL FOR THE TOTALISATION OF CONTRIBUTIONS

Useful contributions are:

• The compulsory ones (employment or self-employment);
• the voluntary ones;
• Imputed contributions (military service, sickness, maternity, redundancy pay, unemployment, mobility, etc.);
• Contributions from redemption (legal degree course, activities carried out in countries, not in agreement with Italy, etc.).

For the payment of pensions by Italian social security agencies, the same rules apply to all insured persons.

It is necessary to reach the age and contribution requirements for the old-age pension or early retirement pension established by law. This is in addition to any other requirements for the accrual of pension rights.

The accumulation of contributions does not apply when the worker has fulfilled a pension in a foreign country.

EXISTING TOTALISATION AGREEMENTS WITH ITALY

Italy has stipulated international conventions, which allow the aggregation of insurance periods, with the countries:

Argentina; Australia; Bosnia-Herzegovina; Brazil; Canada and Quebec; Cape Verde; Croatia; Jersey and the Channel Islands; Serbia-Montenegro; Macedonia; Monaco; San Marino; United States of America; Tunisia; Turkey; Uruguay; Vatican; Venezuela.

The possibility of aggregation also exists with the member states of the European Union, the states that are part of the European Economic Area (Iceland, Norway, and Liechtenstein), and Switzerland.

PENSION CONTRIBUTIONS PAID ABROAD: MULTIPLE AGGREGATION

It is possible to combine contributions, valid only for pension purposes, even with periods of work carried out in various countries that have signed agreements between them in social security.

In fact, in these cases, through the application of multiple contribution aggregation, obtaining a pension right for contribution periods worked in foreign countries.

These countries are not linked to each other by a multilateral social security deposit.

A characteristic of aggregation is that there is no transfer of contributions from one country to another, as these remain credited to the respective social security systems.

Therefore, individual states will only be liable for the benefit of the contributions made to their social security systems.

PENSION CONTRIBUTIONS PAID ABROAD: CALCULATION OF THE PENSION

It is essential to understand how the worker’s pension is determined if the totalization of contribution periods is used.

The calculation of the pension, in these cases, is done through the mechanism of pro-rata temporis.

In practice, it is first necessary to aggregate all the periods of contribution in favor of the applicant, which has been credited to all the institutions of the States concerned.

Subsequently, it is necessary to reduce the amount of the virtual pension benefit proportionally based on the ratio between:

the total duration of insurance periods completed in Italy and the total duration of foreign periods

In practice, each Contracting State bears, from a financial point of view, only that part of the social security benefits which corresponds to the contributions paid in that State.

If, however, the benefit calculated according to the national method is more favorable than the benefit accrued with the pro-rata temporis method, the taxpayer will be granted the benefit more favorable to him.

International agreements within the Community stipulate that the person concerned is entitled to receive, from the competent institution of each Member State, the highest of the following amounts:

• that is resulting from the calculation based on national legislation alone (autonomous pension) and
• That resulting from the calculation made according to the pro-rata rules.

APPLICATION FOR A PENSION

The application for a pension must be submitted to the competent institution (in Italy, INPS) of the State where the applicant resides.

The application for a pension is also valid, for all purposes, for the other States in which the person concerned has worked.

It is the duty of the institution of the country of residence to inform the competent social security institutions of the other Member States where the worker has worked of the request submitted by the worker.

The application for a pension is still valid even if the worker does not submit it in the State of residence; this may result in a longer processing time.

On the application forms, which must be collected from the INPS if you are resident in Italy or from the competent institution of the foreign country of residence, you must indicate the personal information. But those relative to the working activity carried out in the different States and all the other data necessary for calculating the pension.

PENSION CONTRIBUTIONS PAID ABROAD: REDEMPTION

As we have seen up to now, if there is a convention on social security and social security in general, the worker will total the contributions credited in the foreign management according to the procedures indicated in the tradition itself.

Otherwise, the worker will be able to accrue the pension according to the rules in force in the contracted State and ask for the onerous redemption of those periods for the right to retirement in Italy.

Therefore, employees can apply for the redemption of work carried out abroad without any time limit. They can also do so after the granting of a pension by the Inps.

The request for payment of contributions for redemption can also be made to partially cover the period during which there was an omission of contributions.

So just the weeks necessary to complete the requirements for access to retirement, in Italy, of course.

Omitted contributions can only be credited after payment of a buy-out charge and are helpful for the entitlement and measurement of all pensions.

PENSION CONTRIBUTIONS: APPLICATION FOR REDEMPTION

The redemption of foreign contributions can be requested by a worker who is an Italian citizen at the time of the request, even if he had foreign citizenship during the periods of work abroad.

In addition, the request can be made even if the applicant is not insured with the Inps. In addition to workers, survivors can also request the redemption of contributions.

The application must be submitted to the Inps office responsible for the area of residence, by filling out the formRE1 specially prepared.

As regards the documentation, the first thing to be presented is the certificate of Italian citizenship. Subsequently, the documentation useful to prove the actual existence of the employment relationship carried out abroad.

PENSION CONTRIBUTIONS: ASSESSMENT OF THE COST OF PURCHASE

The most critical assessment for the worker is the estimated cost of redemption.

In the case of the redemption of periods of outside employment, the amount of the redemption charge is determined on the difference between:

• The amount of the pension to which the applicant would be entitled based on the total contributions credited, including those which have been repurchased,
• The amount of the pension is determined based on the contributions credited in the fund where the redemption is requested.

The value of the charge is determined by applying the contribution rate in force at the date of submission of the redemption request. This is to the extent provided for the payment of the compulsory contribution due in the pension management where the redemption is made.

It also varies according to the age and sex of the worker, the salary received at the time of the application, the number of weeks redeemed, and the length of time the contributions have been paid. It also varies if the applicant already has a pension.