Cross Border Retirement Income: Canada Pension Plans, Canadian LATER YEARS Security, U.S. Social Safety and the Windfall Elimination Provision
Calling all eligible benefit holders of the Canada Pension Plan (CPP), Canadian LATER YEARS Security (OAS) and U.S. Social Security (SS).
Does your or your spouses stor eveny narrate a history of employment in both Canada and the U.S.? If that’s the case, you may have the privilege of drawing from SS, OAS and CPP. The confusion lies amidst the qualifications and how these benefits connect to one another given the Windfall Elimination Provision (WEP).
Lets break it down
Social Security (SS)
To qualify for retirement benefits under U.S. Social Security, you must have credits of covered work. Each credit represents a quarter (i.e. 3 months) of full-time employment. Thus, generally speaking, you must possess years of full time employment to be able to qualify for pension benefits.
All monthly benefits are based on your Primary Insurance Amount (PIA), which is the amount you would receive in the event that you retired at your full retirement age (FRA). The FRA is age for people born before , gradually increasing to age for all those born in and later. You can choose to take it as early as age , resulting in a % reduction in benefits. At a more granular level, the month-to-month PIA is reduced by 5/9ths of 1% for each of the first months before your FRA. You can also choose to earn delayed retirement credits (DRCs) for any month from FRA up to age . DRCs increase the benefit for the retired worker but not the spouse (if utilizing the spousal benefit). If you were born in or later, you earn 8% DRCs for each full year (prorated for months) up to age for a maximum increase of %.
Individuals have the opportunity to take a SS benefit on the greater of their own record or % of their spouses SS benefit.
Canadian Old Age Security (OAS)
The rules to qualify for full OAS benefits under the Canadian system are centered on residency in Canada beyond the age of , not employment history. A full benefit is received when an individual has accumulated a Canadian residence history of years. The pension can commence as early as the month following ones th birthday or be delayed as late as age . By deferring ones OAS, the benefit increases by 0.6% per month/7.2% per year, which equals a % increase if OAS is deferred to age . Partial OAS benefits may be available in certain situations. Lets review a few scenarios:
Lets assume youve lived in Canada less than years and you are currently residing in Canada. As long as you are years or older, a legal resident of Canada or Canadian citizen, and also have lived in Canada at the very least years since the age of , you’re eligible for a prorated OAS benefit.
To take it a step further, lets assume the same scenario with a bit of a twist. Instead of currently residing in Canada, you’re now living in the U.S. These circumstances dictate you must have resided in Canada for a minimum of years since the age of to be able to get a partial benefit.
If neither of these examples apply to you, there may still be an opportunity to collect on the benefit if the country in which you currently reside has a social security agreement with Canada.
One final item on OAS; if one were to reside in Canada at the time of receipt of the OAS benefit, the individual could be subject to the OAS clawback. This would be created when your income exceeds certain threshold levels. For the tax year, the OAS clawback kicks in when earnings exceeds, $,. However, if OAS payments are created to a physical resident of the U.S. rather than a Canadian actual physical or tax resident the clawback provisions are eliminated, and the complete benefit is paid to the recipient. No OAS clawback would apply.
Canada Pension Plan (CPP)
Unlike Old Age Security, CPP is situated upon your pension contributions during your employment record, subject to certain maximums. So long as youve made a minumum of one contribution to the plan, you are entitled to receive a CPP benefit. This benefit can be acquired at age , but one can opt for a reduced benefit as soon as age (reduced by 7.2% annually) or perhaps a delayed benefit as late as age (increased by 8.4% annually). Furthermore, the CPP benefit isn’t at the mercy of any clawbacks.
How then do these benefits tie in with the Windfall Elimination Provision (WEP)?
Understanding the Windfall Elimination Provision
Under Title II of the Social Security Act, the Windfall Elimination Provision was born. It authorized the Social Security Administration to reduce an individuals Social Security benefit in the event the recipient was also receiving a foreign pension (e.g. CPP). To understand the why behind the WEP, its vital that you comprehend how the SS benefit is calculated, specifically the principal Insurance Amount (PIA).
A workers PIA is situated off their average monthly earnings sectioned off into three amounts. These values are then multiplied utilizing three distinct factors. Heres a good example:
For a worker who turns in , the first $ of average monthly earnings is multiplied by %, earnings between $ and $5, by %, and the balance by %. The sum of these three amounts equals the PIA, which is then either increased or decreased depending on when an employee decides to draw SS. This is one way the monthly payment is determined.
Social security was meant to replace section of an individuals pre-retirement earnings. With the prior calculation in mind, one can conclude that workers with lower average monthly earnings have an increased percentage of their pre-retirement earnings replaced via Interpersonal Security than those with higher average monthly earnings. For instance, a year old worker with average earnings per month of $3, could receive a benefit at FRA of $1, ( percent of their pre-retirement earnings), increased by cost of living adjustments. For an employee with $8, of average earnings monthly, the benefit starting at FRA could possibly be $2, ( percent of their pre-retirement earnings) plus cost of living adjustments.
For those individuals whose primary job wasnt covered by Social Security, yet had their benefits calculated as though they were a long term, low-wage worker, they would end up receiving a benefit that would cover a higher percentage of these earnings, plus a pension from a job for which they didnt pay Social Security taxes. This is true for someone who spent time doing work for an employer in Canada, earning CPP credits.
Under the Windfall Elimination Provision (WEP) the calculation for a workers Social Security benefit needs to account for the CPP payment. The % factor on the first $ of monthly average earnings (when estimating PIA), could possibly be reduced depending on the amount of years of U.S. earnings history. The WEP is eliminated once an employee has or more many years of substantial earnings in the U.S.
The U.S. Social Security Administration has an Online WEP Calculator that is available via:
Despite the current provisions of WEP, a U.S. Class Action lawsuit has been filed on behalf of Canadians who receive SS benefits and also have been impacted by WEP. The suit was recently filed in the State of Indiana against the SSA. The crux of the lawsuit is whether the application of WEP against individuals who also have the same benefits in Canada is lawful. The Plaintiffs in the Class Activity are claiming that the application of WEP to U.S. benefit recipients is unlawful and presents a violation of the plain meaning of the U.S. Social Security Act, U.S. Social Security Act Regulations and the Social Security Agreement ) between USA and Canada (the Social Security Agreement). The Plaintiffs would like retroactive payment of the amounts which have been deducted through the use of WEP and the ending of the use of WEP moving forward. The claim offers been certified but has yet to go forward at the trial court level.
In Summary: Although a workers Social Security is potentially reduced by CPP, the good news is that OAS does not factor into the WEP calculation. Whether the WEP impacts your Social Security depends upon the uniqueness of your individual circumstances and the potential result of the Class Action Lawsuit. If you believe you may be impacted by WEP, we recommend you’ve got a cross border financial planner such as for example Cardinal Point analyze your position.