If you were fortunate enough to have worked in both the U.S. and Canada, there is a good chance that you will have both U.S. social security and a Canadian pension. Unfortunately, this brings an added wrinkle regarding when you should turn on each benefit. This article discusses how the Windfall Elimination Provision (WEP) reduces your social security benefit if you don’t have over 30 years of work experience here in the U.S. Having a social security benefit that is subject to WEP, makes an already difficult decision, when to draw social security, even more difficult. Do you draw your CPP early, which reduces how much your social security will be negatively impacted? Or, do you draw social security early and wait to turn on CPP, which allows you to draw social security for years before WEP impacts your benefit. This article discusses some of the timing strategies that you have when you have both social security and the Canadian Pension Plan (CPP).
Starting Social Security Early and Delaying CPP
You can start drawing your social security as early as age 62 and you can delay and grow your CPP until age 70. The biggest benefit of this strategy is the ability to draw social security for up to 8 years before you start collecting your CPP, therefore not having any WEP reduction for these 8 years. One of the important things to remember about WEP is that your social security benefit is not reduced until you turn on your CPP. Therefore, starting social security early allows you to collect an un-impacted benefit while allowing your CPP to grow until age 70.
The biggest issue with this strategy is that once you do turn on your CPP, WEP is going to have a major impact on your social security benefit. This is because if you have less than 20 years of work experience in the U.S., your social security will be reduced by half of your CPP or up to $448 in 2018, whichever is less. A $448 reduction in your social security benefit will be significant, especially given that you started social security early and already have a reduced benefit.
Delaying Social Security and Starting CPP Early
You can start CPP as early as age 60 and you can delay and grow your social security benefit until age 70. The benefit of this strategy is that you are starting CPP early which reduces your CPP benefit and therefore reduces the amount in which your social security will be reduced by WEP. Also, you are getting a higher social security benefit, so the WEP reduction compared to total social security benefit is minimal.
The hardest part about delaying social security this long and taking a minimal CPP is surviving those first few years of retirement with very little fixed income. Although from age 70 and beyond you will have a high amount of social security coming in, you will need to rely on high retirement account distributions until you turn on social security.
Recently, I had a client who had a private Canadian pension as well as CPP. He had an incentive to turn on his Canadian private pension early as it stops growing after a certain age. Also, because of the higher private Canadian pension, as soon as he turned on his U.S. social security, it would be reduced by $448 because of WEP. Therefore, we determined he would be better turning on his Canadian private pension and CPP early and wait to draw his social security benefit until age 70.
Delaying Both Social Security and CPP
In theory, this strategy seems to make the most sense because delaying both social security and CPP allows both benefits to grow, and allows you to collect a higher overall benefit. Typically, the longer you wait to draw social security and CPP, the more that you will earn over your lifetime, as long as you live past around age 80. Certainly, age 80 is not guaranteed, but becoming more and more likely as people are living longer. Also, if you are married, your spouse will receive your higher benefit for the rest of their life, if you pass first. Therefore, delaying social security provides a kind of insurance policy for your spouse.
Still, the math doesn’t always make sense to delay both benefits. For example, your social security will increase each year that you delay your benefit but your CPP will also increase. This may seem good, but this also means that your WEP reduction will also potentially increase as you delay CPP. You could be in a situation in which your WEP reduction is growing by the same amount as your social security benefit each year, essentially eliminating the benefit of delaying. If you are in that situation, you may decide to start either your CPP or social security benefit or continue to delay until social security starts growing by more than the WEP is reducing it.
Start Both Social Security and CPP Immediately
Starting both of your benefits as soon as possible has its pros and cons. The benefit is that you are starting your CPP early which reduces how much your social security will be impacted by WEP. Therefore, the lower social security benefit you will receive by starting early won’t have as big of an impact. Also, you are collecting this fixed income in your 60s, when you may need it most, and are spending more money.
The negative is that this strategy will almost always provide the least amount of income over your life unless you pass away in your early to mid-70s. Yes, your social security will have a minimal WEP reduction, but you are also starting with a lower benefit. I’m not saying that you shouldn’t turn on both benefits early, but the tradeoff for starting your income early is a lower annual benefit over a longer period of time.
Deciding when to start social security is difficult enough, throw in your CPP benefit, and the timing strategy seems impossible. There is no right answer when to start your CPP and social security benefit. The decision needs to be based on the size of your social security benefit, CPP, the length that you worked in the U.S. and Canada, and if you have any other private pension plans. Having this many options may seem daunting, but you should look at it as an opportunity. Having this many options allows you to customize your retirement income to best suit your retirement needs.