Sometimes, as a financial planner, I have to deliver bad news.
“We may have to look at cheaper homes.”
“Sure, you can retire this year, but you may have to sell the boat.”
“No, you can’t buy lotto tickets in your Roth IRA.”
The other day was no exception. A client came into the office, having finally collected his U.S. and Canadian retirement benefit information. He worked and lived in Canada for 15 years, before coming here to the U.S. and working the past 18. He is planning on retiring next year, and was feeling pretty good after seeing his U.S. social security, Canadian Pension Plan (CPP) and Old Age Security (OAS) estimates. By his calculation, he would receive $1,800 from social security, $850 from CPP and $250 from OAS each month. He figured a cool $2,900 coming in each month from the U.S. and Canadian government combined. Then I had to deliver the bad news. The Windfall Elimination Provision (WEP) is going to wipe out about $400 from his social security calculation. I hardly had the heart to tell him that he may lose out on the OAS benefit as well. This post addresses how WEP may impact your social security benefit if you have a CPP.
What is WEP and when does it apply?
Most of us have to never worry or deal with WEP. If you have only worked in the U.S. and paid social security taxes on your income, you probably won’t have a WEP reduction. WEP is applied when you have earned a pension while not paying social security taxes on the income. This tends to happen in two occasions:
- You worked for a state or nonprofit organization that provides a social security equivalent pension, but you don’t make social security payments
- You worked in a foreign country and accrued a pension, while not contributing to social security
The second example is what I tend to run into the most. For example, maybe you spent some of your working career in Canada. While in Canada you earned Canada’s equivalent to social security, CPP. The pension you earned in Canada now impacts your U.S. social security through WEP. Some states, like Ohio state workers, may not contribute to social security, as they have set up their own form of social security. This pension benefit would also impact your social security benefit through WEP.
What is the reason for WEP?
It may not seem fair that just because you worked somewhere in which you earned a pension and didn’t pay into social security, your social security gets cut. Still, there is actually an explanation for WEP. Social security is meant to replace a certain amount of your pre-retirement income. Also, social security is based on your total lifetime earnings. For people who have earned less during their working career, social security replaces a higher percentage of your pre-retirement income.
In order to do this, lower income earners actually get a little boost to their social security benefit. Social security assumes that they are taking into account all of your earnings. Social security can’t account for years in which you worked and paid into a pension, but not social security. Therefore, WEP is meant to eliminate this “boost” that you get that should only be eligible for lower income earners. WEP may not seem fair, but there is a reasonable explanation.
How is your social security benefit calculated?
I’m not going to get into the exact math on how your social security benefit gets calculated. The formula is complex and it’s a waste of time to do the math on your own when there is a quick online calculator in which you can get an estimate quickly here. Here are some of the basics of how your social security benefit is calculated. The more that you earn over your working career, the higher your social security benefit. Also, social security is based on the highest 35 years of your working career. Back in the day social security used to send an annual statement with your estimated benefit. A few years back, in order to save money, they stopped sending out the statement. However, the simple calculator will help you determine your social security benefit at different ages.
How does WEP affect your social security benefit?
If you are collecting a pension from a country or a company/state/city in which you didn’t pay social security taxes, you may have a WEP reduction. The amount of the WEP reduction is based on 2 things:
- The value of your uncovered pension
- The amount of years that you have worked in the U.S.
Below is the WEP reduction table for 2022. The vertical number is the number of years that you had “substantial” earnings and made social security payments. The number next to that is the maximum WEP reduction.
2022 Maximum WEP Reduction
|Years working in the U.S.||Maximum WEP Reduction|
|Less than 20||$512|
|More than 30||$0|
Source: Social Security
A few notes about the WEP reduction:
- The WEP reduction is the lesser of the WEP reduction number above or ½ of your pension benefit
- If you have a foreign pension, the WEP reduction amount is subject to foreign exchange rates
- A surviving spousal benefit is not subject to a WEP reduction
- If you have more than 30 years of substantial earnings here in the U.S., you will have no WEP reduction
- The maximum WEP reduction is $512, but only applies if you have less than 20 years of substantial earnings
U.S. Substantial Earnings
The more years that you have worked in the U.S. and had “substantial earnings”, the less your social security is subject to WEP. In fact, if you have over 30 years of substantial earnings in the U.S., you will have no WEP reduction.
Here is a chart that shows how much you would have had to earn each year in order to have had “substantial earnings” in the U.S.
Source: Social Security
Delaying or starting social security early and WEP
I am not going to go too much into the basics of social security. However, you probably already know that you can start social security as early as age 62 and can delay to as late as age 70. The government has decided that your full retirement age (FRA) is somewhere between age 66 and 67, depending on when you were born. The WEP reduction table above assumes that you start your social security at your FRA. If you start your social security benefit early, you will have a smaller WEP reduction. If you delay social security, you will get a higher WEP reduction.
For example, if your FRA is age 66, you will get 75% of your full benefit if you start at age 62. This is the same amount that your WEP is reduced. For example, let’s say that you have less than 20 years of substantial earnings and are subject to the maximum $512 WEP reduction. If you start social security at age 62, you will have only a $384 WEP reduction. Of course, by starting social security early, you will also have a smaller social security benefit.
Each year that you delay social security past your FRA, you get an 8% increase in your social security benefit. You also get an 8% increase each year in the WEP. If you delay until age 70, you will have a 32% increase to the WEP benefit. Therefore, instead of having a $512 WEP reduction, you will have a $696 reduction to social security.
Here’s an example of social security benefits after 2018 WEP reduction, assuming 66 is the FRA and the maximum WEP reduction.
|Age||Social Security||WEP Reduction||S.S. Benefit after WEP|
Social security WEP reduction and COLA
Social Security has a cost of living adjustment (COLA) which increases your benefit to keep up with inflation. Unfortunately, if you have a WEP reduction, you get the short end of the stick here. Instead of increasing your social security benefit prior to the WEP reduction, they increase your smaller amount after the WEP reduction benefit. The social security COLA is 5.9% for 2022. In the example above, if you started your social security at age 62, you would be receiving $1,164 per month. In 2022, because of the COLA, your monthly pension would increase by 5.9% to $1,233. If they increased your base social security benefit, prior to the WEP reduction, you would have the higher $1,181 after the COLA adjustment. It’s not a huge deal, but something that adds up over time.
The WEP reduction is confusing and can make determining your social security benefit seem impossible. Luckily, social security has put together a fairly simple calculator that allows you to determine your social security benefit after a WEP reduction. I’ll let the calculator deliver the bad news, so I don’t have to this time.
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I have a HOOP pension from working in Hospital in Ontario and I paid CPP on the money going into the pension which is equivalent to social security. This is a private pension fund and I was limited to my RRSP contributions each year. Will this pension be affected by WEP
There is a agreement between the two countries that if you only pay social security/cpp in one country.
Therefore, I have already given the Canadian government the cpp on the money so why should I be penalize in the states?
Unfortunately, you may still have a WEP reduction on your social security benefit. Your private pension and CPP are not impacted by WEP. Social security has a WEP reduction because you had a job in which you earned a pension and didn’t pay social security taxes. Sorry for the bad news.
Actually I did pay social security on pension in the form of CPP to the Canadian government and I was not allow to get a a RRSP which is equivalent to an IRA.
Yes, I was referring to U.S. social security taxes.
I worked in USA for 7 years and so far working in Canada for 8 years. Assuming if iI work 10 years in Canada. Whether I will get USA social security? I am a Canadian Citizen.
It sounds like you will already qualify for CPP and Social Security. You don’t need to get to 10 years of work in Canada to qualify for Social Security.
I’m a Canada /US dual citizen, contributed to CPP for a few years, then contributed to SSA for 16 years while working in the US.
I started receiving SSA benefits 3.5 years ago at age 62 which amount to US $1,272 monthly. All good.
I just started receiving CPP benefits two months ago which are the equivalent of US $ 95 monthly.
It seems unlikely that such a humble benefit from CPP would be subject to WEP, so I’d like to avoid all that procedure and forms if possible.
I don’t have any significant assets in either country, nor do I hold any significant assets.
Given my simple scenario is therea short answer to “Are my CPP benefits subject to WEP?”
Many thanks for any non-binding advice and direction you can give.
Hi Richard, unfortunately, it does appear that you will have a small WEP reduction. You have less than 30 years of U.S. work and have a CPP benefit so your SS should have a WEP reduction. However, your WEP reduction will probably be very small, about $50 per month.
Thank you so much!
Stepping back for a moment, the service you provide is invaluable, especially for us elderly trying to navigate the tomes of doublespeak the SSA has on it’s website.
Now it’s clear and simple thanks to you: Those of us who contributed less than 30 years through regular W2 employment must pay a penalty.
Now I’ll be sure to complete the forms, obtain confirmation from CPP, and avoid a penalty later on.
Thanks again, you’re a star!
Hi Bryan, Thank you for this wonderful article that I happened upon when searching for if exchange is applied when SS calculates WEP reduction. I am Canadian/US citizen. I worked 17 years in the USA and was blind sided by this reduction when I took my SS at full retirement in July 2021. Today I received a letter from SS informing me that I owe $1,600 within 30 days, noting that they calculated my reduction on my monthly net amount of $595 instead of the gross amount of $751.
My question is related to something you mentioned in your article, “If you have a foreign pension, the WEP reduction amount is subject to foreign exchange rates” and how this would apply to my situation. The $751 is the CPP benefit in Canadian funds and the $595 was my benefit as deposited by the Canadian government into my US bank account in US funds. My deposit fluctuates monthly based on current exchange and at that time the Canadian/US exchange rate was better. Currently the Canadian dollar is weaker and my last deposit was $565.. Now that I see from you article that the WEP almost cancels out my entire CPP, I am even more disheartened. So my question is how would the WEP be subject to foreign exchange rates and do I have a case for appeal?
Thank you so much!
Thanks for the question. The WEP reduction should be based on the exchange rate when you first started receiving your second benefit. Meaning that if you turned on CPP first, once you start social security WEP would be based on the exchange rate when you turn in social security. Your WEP amount is then locked in regardless of where the exchange rate moves. Ideally, you turn on SS when the dollar is strong because it results in a lower WEP reduction.
In my opinion, your WEP should be half of the U.S. dollar amount that you were receiving, which is $297 USD. If the number is different than that, you may have a chance of appeal. Thanks, and good luck.
What is the likelihood in your opinion that WEP will be repealed any time soon?
Unfortunately, I don’t see it passing anytime soon. It is a bipartisan bill, so it is possible that it could pass in this political environment. However, I’m not sure anything will be getting done in the next couple years.
Thank you so much for your reply and all the information you provide in your articles. I am going to request a reconsideration and again a summary of their calculations as I did my application over the phone during COVID and was not provided with the calculations even though I asked for them.
I read the WEP bulletin and have looked all over the SS website for the statement that foreign exchange is applied in the WEP calculation and cannot find it. Would you be so kind as to direct me to the SS page containing that information as I would like to quote it in my appeal. The letter states that they should have used the higher number in their calculations, which is the amount in Canadian funds, as I believe they are in error. Not too keene on having to send $1600 in the meantime….beurocracy!
Armed with the information about the exchange and that the WEP cannot be more than 50% of CPP in US funds will help me feel confidant in discussing this in appeal.
You are amazing!
Here is the link from the SSA Procedure Manual that discusses exchange rate and how to verify it: https://secure.ssa.gov/poms.nsf/lnx/0300605372
Thanks, and good luck.
Many thanks Bryan, I erred and posted the same question twice!
Thanks to you I’ve contacted SSA because I never received a confirmation from Canadian CPP about my benefit award. Much appreciated!
I didn’t see a reply button on your reference for the exchange rate application but want to thank you. I really appreciate your assistance. You have helped immensely and decreased my stress level in responding to SS!
Thanks for this excellent article! I worked in the US over 10 years, but have now lived and worked in Canada for over 30 years. I’d like to apply for CPP, OAS, and US Social Security. Do I need to apply separately to the US, or is there a special process required to apply for all these at once? Also, is it worth it for me to apply to the US? I’m thinking the WEP will effect me, and I’m wondering if I would get less CPP once I start receiving US Social Security. Is that correct?
Hi Chris, You will apply for CPP and OAS via Service Canada (Canada) and Social Security through the U.S. You are typically always better off with Social Security. You will probably get a reduction to your U.S. SS becuase of your CPP, but you will should get all of the benefits that you qualify.
I worked in Canada for 25 yrs and then moved to US and have approx 20yrs worked here. I want to know if I can just apply and receive the SS (which I qualify for 100% using US work credits) and just not apply for the CPP as it will affect my SS income negatively? I will apply for the OAS though. Can one do this ? BC
Hi Beverly, Yes, you don’t have to apply for CPP. However, if you are eligible, it almost always makes sense to collect it if you can. No reason to leave money on the table. CPP will reduce SS, but not by more than your CPP benefit.
Thank you for your blogs, you provide great explanations. I currently only have 26 years of “substantial earnings” in the US, but plan to retire this year. I plan to perform Roth conversions in each of the next 3 years. Assuming these exceed the minimum amounts required, would these qualify as “substantial earnings”, satisfying the 30 years or more requirement to avoid WEP reduction?
Unfortunately, no these won’t count towards substantial earnings because you don’t pay social security taxes in Roth Conversions. You need to have substantial earnings in which you pay social security taxes, which is only from earnings.
Thanks for your insights on this topic. Very helpful! I worked in Canada doing summer jobs then went to school in the US. I started my career in the US in 1992 and retired in 2022 – started Social Security at 66 1/2. I am living in the US (citizen). Each year of my US work history, I crossed the substantial earnings threshold as verified by the online report from Social Security. I just started receiving CPP, a whopping $65 US/month and I will hopefully receive OAS, estimated at $250 US/month once the US sends quarterly Social Security contribution information to Service Canada to fill in my work history – this may never happen!
My assumption, based on your article, is that my 30 years of “substantial earnings” will reduce my WEP exposure to $0. My question is about OAS. You touched on it in the beginning of your article, is it just treated the same as CPP?
Thanks for the help.
Thanks for the question. OAS does not impact your WEP reduction. Which it sounds like won’t impact you anyway because of the 30 years of substantial earnings. Both OAS and CPP are counted as social security income here in the states for tax planning purposes.