Retirement planning is hard enough if you have always lived and worked in the United States. If you have worked in both Canada and the U.S., retirement planning may seem impossible. You have to deal with a moving exchange rate, different tax codes, and enough retirement planning acronyms to make you crazy (IRA, RRSP, TFSA, RRIF, etc.) Also, if social security planning isn’t difficult enough, now you need to deal with a CPP (another acronym). The CPP can negatively (or positively) impact your social security benefit. Confused yet? This article will help you determine if your U.S. social security benefit will be impacted by working and earning a CPP in Canada.
The Good (and Bad) of the Totalization Agreement between the U.S. and Canada
In 1984, the U.S. and Canada agreed to a Totalization Agreement. The order was to help “protect” social security benefits for people that have worked in both the U.S. and Canada. Yet, many people who are affected by this agreement feel it robs them of some of their social security, not protects it.
The Totalization Agreement allows U.S. workers to combine work experience in the U.S. and Canada to qualify for social security. This allows people to qualify for social security, even without having enough work credits. In the U.S. you need 10 years of work experience to qualify for social security. So, let’s say that you worked for 6 years in the U.S., and then took a job and moved to Canada for 20 years before retiring. Under normal social security rules, this would mean that you would miss out completely on social security. However, the Totalization Agreement allows you to use your Canadian work experience to qualify for social security when you retire. Seems like this is a win-win for retirees until you find out the ugly side of the agreement.
Unfortunately, the agreement isn’t good for everyone. The Totalization Agreement is great for those who have worked for less than ten years in the U.S. However, it is not as friendly if you actually qualify for your own social security benefit. The agreement contains a Windfall Elimination Provision (WEP), which reduces your U.S. social security benefit if you have worked in a job in which you didn’t pay into social security. This includes working in Canada in which you earned a CPP and didn’t pay into social security.
How much will your social security be impacted by WEP?
The amount your social security benefit that is reduced by WEP depends on two factors: How long you worked in the U.S. and the size of the Canadian pension that you earned.
The longer that you worked in the U.S. and paid into social security, the less that WEP will negatively impact your benefit. If you have worked in the U.S. for over 30 years, you would have no reduction in your U.S. social security benefit. If you have less than 20 years of work experience in the U.S., your social security can be reduced by as much as 60%. This may seem extreme, but there is a limit to how much your benefit can be reduced.
Your social security benefit can only be reduced by the lesser of 50% of your CPP (plus any other Canadian pension you may have earned) or an annual limit which is set by the government each year. In 2022, the most that your social security can be reduced by WEP is $512 per month. This applies to someone with less than 20 years of work experience in the U.S. So, if your only Canadian pension is the CPP and the CPP is $500, the most that your social security can be reduced is $250 per month. OAS is not included in the WEP calculation.
Why does WEP reduce social security benefits?
Social security is a progressive system in which workers who have paid less into social security actually receive a higher, relative to earnings history, benefit compared to a higher income worker. Essentially, the social security system is set-up to give a little bonus to lower-income workers and assumes that people who have paid less into social security have earned less over their life. This assumption though isn’t necessarily correct if a person has earned a lot over his lifetime but has done so in different jurisdictions. Therefore, WEP was created to eliminate this extra social security benefit that is given to lower-income workers. I’m not saying this is right, but social security is riddled with these odd adjustments.
When does WEP impact your social security benefit?
Your social security is not lowered by WEP until you actually turn on your CPP or other Canadian pensions. So, if you turn on your U.S. social security at age 62 but delay turning on your CPP until later, you would receive your full age 62 benefit until you turn on CPP. This is where social security and CPP planning is very important. For example, does it make sense to turn on social security at age 62 and delay CPP and other Canadian pensions until later? This allows you to collect an unreduced social security benefit for up to 8 years, before getting the WEP reduction. Or, does it make sense to turn on CPP immediately at age 60? Your CPP benefit will be lower and therefore will have less impact on your social security benefit. And you thought just planning for U.S. social security was confusing! I wrote this article about social security strategies when you have a CPP.
If you would like, the social security administration has a WEP benefit calculator on its website, so that you can calculate your after WEP social security benefit. WEP Social Security Calculator
If you have worked in both the U.S. and Canada, developing a retirement strategy that reduces WEP is crucial. However, most financial advisors have no idea how social security, CPP, and WEP work together. Are you ready to work with a financial advisor that truly understands your cross-border retirement needs. If so, schedule a complimentary meeting below.