Collecting CPP in the U.S.

When I called a prospective client a week ago, my jaw dropped. “What do you mean you’re not going to turn on your CPP benefit?”, I asked in amazement. She had been told that CPP reduces her social security benefit, so it was better to never turn it on. As a cross-border financial planner I hear so many wrong statement about CPP, I don’t know why I should even be surprised. Finally, it was her jaw that dropped when I told her that she was costing herself over $300 per month in retirement benefits.

This article helps clear up the confusing topic of collecting CPP here in the U.S.

What is CPP?

The Canadian Pension Plan (CPP) is very similar to social security here in the U.S.  Participants make contributions to the CPP during their working career.  In retirement, those participants can then receive a monthly pension benefit based on the amount that was contributed to the CPP.  The CPP is meant to replace income in retirement.  If you have lived in Quebec, there is a very similar benefit called the Quebec Pension Plan (QPP).  This article addresses CPP, but the QPP benefits are very similar. 

You can receive a full CPP benefit at age 65.  However, you can apply and start CPP benefits at a reduced rate as early as age 60.  You can also delay, and grow your CPP benefit, until age 70. 

Qualifying for CPP while in the U.S.

Qualifying for a CPP benefit is actually very easy.  If you live in Canada and earn at least $3,500 per year, you must make a contribution to the CPP. Therefore, there is a good chance that even if you worked in Canada for a short amount of time, you will be eligible for a CPP benefit.  Receiving these benefits in the U.S. is equally as easy.

In 1984 the U.S. and Canada came to an agreement that made qualifying for retirement benefits easier if you have worked and lived in both countries.   From the Social Security Administration: 

To be eligible to have your U.S. credits counted, you must have earned at least one year of credit under the CPP or QPP. It is not necessary to consider U.S. Social Security credits in determining eligibility for CPP or QPP retirement benefits since anyone who has made at least one contribution to either plan can qualify for a retirement benefit at 65 or a reduced retirement benefit as early as 60.

In short, if you have worked in Canada, even for a short amount of time, you will typically be eligible to receive a CPP benefit here in the U.S.    

How Much is My CPP Benefit? 

I mentioned how easy it is to qualify for CPP here in the U.S. in the previous section.  However, qualifying for a high CPP benefit requires a little more work.  The longer that you have worked in Canada and contributed to the CPP, the higher your benefit.  You just need to earn $3,500 in a year to contribute to the CPP.  However, there is also an earnings ceiling in which your CPP contributions are maxed out in a year.  In 2019, the CPP earnings ceiling is $57,400 and the maximum CPP contribution is $2,748.90 for employees.  Employers make the same matching contribution as well. 

Maximum CPP Benefit in 2019

In 2019, the maximum CPP benefit is C$1,154, however the average amount for new beneficiaries is C$679.  This assumes that you are starting your CPP benefit at age 65.  You can start your CPP as early as age 60 and can delay as late as age 70.  The longer you delay, the higher the benefit.  If you take your CPP at age 60, your benefit will be reduced by 36% (7.2% annually).  If you delay to age 70, your benefit will increase by 42% (8.4% annually). 

Collecting social security and CPP

Now for the bad news.  Yes, you can collect social security and CPP, however, there is a good chance that your social security will be reduced if you also have a CPP benefit.  If you have worked for less than 30 years in the U.S. and have a CPP, your CPP will be reduced by what is called the Windfall Elimination Provision (WEP).  You can read more about WEP in my article, “CPP, U.S. Social Security, and WEP”.

How much will WEP lower my social security benefit? 

Your WEP impact is based on two things: 

• The size of your CPP (plus other private Canadian pensions if you have one)
• The amount of time that you have worked in the U.S.

In 2019, the maximum WEP reduction is $463 per month.  This max WEP reduction is for someone that has worked in the U.S. for less than 20 years.  Each year that you have worked in the U.S. after 20 years, your WEP impact is reduced.  If you have more than 30 years of work experience here in the U.S., your WEP reduction is eliminated. 

So, should you even turn on your CPP if you have a small benefit?  Yes, because the most that your social security can be reduced by WEP is ½ of your CPP and private Canadian pensions.  Therefore, if you have a smaller CPP you will have a smaller WEP reduction.

When does WEP start? 

WEP does not start until you turn on both your social security and your CPP (or Canadian private pension).  Therefore, there are some planning options available to you.  For example, do you start your CPP benefit early and delay social security?  This would allow you to collect a CPP benefit WEP free, while deferring and growing your social security benefit.  You could also do the same thing but start social security early and delay starting CPP.  There are many options here, however making the wrong decision can cause you a lot of money in retirement. 

For a more detailed article on your planning options you can read my article, “Social Security Strategies When You Also Have a Canadian Pension”.

Taxation of CPP in the U.S.

Taxation of your CPP benefit in the U.S. is the same as the taxes on your U.S. social security benefit.  There is no foreign tax withholding on your CPP benefit here in the U.S.  Meaning that you will receive the full benefit, with nothing paid to Canada.  In the U.S., there are tax advantages on social security income, compared to other types of income.  For example, at least 15% of your social security/CPP benefit is completely free from federal taxation.  In fact, depending on your income, all your social security/CPP may be free from federal taxation.  Also, most states don’t tax social security either.

Please read, “Taxation of your RRSP, RRIF, CPP and OAS in the U.S.”, for a more detailed look of your Cross-Border taxation here in the U.S.     

Conclusion

One of the biggest decisions that most retirees have here in the U.S. is social security timing.  As a cross-border retiree, this decision is made even more difficult.  Not only do you have to decide on when to start CPP, you also must contend with WEP.  Making the wrong decision can cause long-term headaches for your cross-border retirement plan.  The good news, however, is that you can collect a social security and CPP benefit here in the U.S.  Also, it is easy to qualify for CPP here in the U.S.  The bad news is now trying to determine the best time to start these benefits. 

Need More Help?

Are you missing out by working with a financial advisor that doesn’t fully understand your cross-border financial planning needs? Are you interested in working with a financial planner that specializes in your cross-border financial planning situation? Schedule a complimentary meeting below, and let’s create your cross-border financial plan.

Image by Keith Johnston from Pixabay