Cross Border Retirement Income: Canada Pension Plan, Canadian Old Age Security, U.S. Social Security and the Windfall Elimination Provision

Calling all eligible benefit holders of the Canada Pension Plan (CPP), Canadian Old Age Security (OAS) and U.S. Social Security (SS)……….

Do you or your spouses’ story narrate a history of employment in both Canada and the U.S.? If so, you may have the privilege of drawing from SS, OAS and CPP. The confusion lies amidst the qualifications and how these benefits interact with one another given the Windfall Elimination Provision (WEP).

Let’s break it down……

Social Security (SS)

To qualify for retirement benefits under U.S. Social Security, you must have 40 credits of covered work.  Each credit represents a quarter (i.e. 3 months) of full time employment.  Thus, generally speaking, you must have 10 years of full time employment in order to qualify for retirement benefits.

All monthly benefits are based on your Primary Insurance Amount (PIA), which is the amount you would receive if you retired at your full retirement age (FRA). The FRA is 65 for people born before 1938, gradually increasing to 67 for those born in 1960 and later. You can choose to take it as early as 62, resulting in a 25% reduction in benefit. At a more granular level, the monthly PIA is reduced by 5/9ths of 1% for each of the first 36 months before FRA. You can also choose to earn delayed retirement credits (DRCs) for any month from FRA up to age 70. DRCs increase the benefit for the retired worker but not the spouse (if utilizing the spousal benefit). If you were born in 1943 or later, you earn 8% DRCs for each full year (prorated for months) up to age 70 for a total increase of 32%.

Individuals have the opportunity to take a SS benefit on the greater of their own record or 50% of their spouses.

Canadian Old Age Security (OAS)

To qualify for full OAS benefits under the Canadian system, the rules are centered on residency in Canada, not employment history, beyond the age of 18. A full benefit is received when an individual has accumulated a Canadian residence history of 40 years. The pension can commence as early as the month following one’s 65th birthday or be delayed as late as 70. By deferring one’s OAS, the benefit increases by 0.6% per month/7.2% per year, which equals a 36% increase if OAS is deferred to age 70. Partial OAS benefits may be available in certain situations. Let’s paint a couple scenarios:

Let’s assume you’ve lived in Canada less than 40 years and you are currently residing in Canada. As long as you are 65 years or older, a legal resident of Canada or Canadian citizen and have dwelled in Canada at least 10 years since the age of 18, you are eligible for a prorated benefit.

To take a step further, we’ll assume the same aforementioned scenario with a twist. Instead of currently residing in Canada, you are now living in the U.S. These circumstances dictate  you must have resided in Canada for a minimum of 20 years since the age of 18 in order to receive 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 noteworthy item on OAS; if one were to reside in Canada at the time of OAS payment, the individual may be subject to OAS claw-back stipulations should income surpass certain thresholds. On the other hand, if OAS payments are made to a resident of the U.S., the claw-back provisions are eliminated, and the benefit is paid.

Canada Pension Plan (CPP)

Unlike Old Age Security, CPP is based upon your pension contributions through your employment record, subject to certain maximums. As long as you’ve made at least one contribution to the plan, you are entitled to receive a benefit. The benefit is available at 65, or one can opt for a reduced benefit as early as age 60 (reduced by 7.2% annually) or a delayed benefit as late as age 70 (increased by 8.4% annually). In addition, the CPP benefit is not subject to any claw-backs.

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 benefactor was also receiving a foreign pension (i.e. CPP). To understand the “why” behind WEP its important to comprehend how the SS benefit is calculated, specifically the Primary Insurance Amount (PIA).

A worker’s PIA is based off their average monthly earnings separated into three amounts. These values are then multiplied utilizing three distinct factors. Here’s an example:

For a worker who turns 62 in 2018, the first $895 of average monthly earnings is multiplied by 90%; earnings between $895 and $5,397 by 32%; and the balance by 15%. The sum of these three amounts coincides with the PIA which is either increased or decreased depending on when a worker decides to draw SS, before or after their full retirement age (FRA). This is how the monthly payment is determined.

Social security was meant to replace part of an individual’s pre-retirement earnings. With the previous calculation in mind, one can seamlessly deduce that workers with lower average monthly earnings have a higher percentage of their pre-retirement earnings replaced via Social Security than those with higher average monthly earnings. For example, a 62 year old worker with average earnings per month of $3,000 could receive a benefit at FRA of $1,479 (49 percent of their pre-retirement earnings) increased by cost of living adjustments. For a worker with $8,000 of average earnings per month, the benefit starting at FRA could be $2,636 (32 percent of their pre-retirement earnings)  plus cost of living adjustments.

For those individuals whose primary job wasn’t covered by Social Security, yet had their benefits calculated as if they were a long term, low-wage worker they would end up receiving a benefit that would cover a higher percentage of their earnings, plus a pension from a job for which they didn’t pay Social Security taxes. This is true for the worker that spent time working for an employer in Canada, earning CPP credits.

As such, the calculation for a worker’s Social Security benefit needs to account for the CPP payment under the Windfall Elimination Provision. The 90% factor on the first $895 of monthly average earnings (when estimating PIA), could be reduced depending on the number of years of U.S. earnings history. The WEP is eliminated once a worker has 30 or more years of substantial earnings in the U.S.

In Summary: Although a worker’s 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 on the uniqueness of one’s individual circumstances. Furthermore, the analysis of your particulars should be carried out by a cross border planner. For more information contact Cardinal Point.

Understanding the Canada-U.S. Totalization Agreement

Many Canadians and Americans face the reality of a career that spans both north and south of the 49th parallel. Amidst an era of globalization, it is common for promotions to propel opportunities across either side of the border. On the other hand, others are faced with the fallout of a company restructuring, triggering the need to accept an offer aligned with new business realities. The net result can lead to some confusion on how an individual’s history of employment can be quantified, relative to the necessary requirements to qualify for each country’s pension plan. Specifically, how are my Canada Pension Plan (CPP), Canadian Old Age Security (OAS) and U.S. Social Security (SS) affected by my work experience in both Canada and the U.S.? What if I don’t meet the minimum eligibility criteria to qualify for these pensions?

Let’s re-examine the eligibility requirements for these three pension plans. CPP and SS are based upon one’s earnings record. The difference is that the SS minimum criteria for eligibility, requires ten years of service as opposed to CPP, which mandates a single payment into the pension in order to become eligible. OAS criteria follows a different qualification path. Rather, it is based upon residency rules vs. work history. In particular, the amount of time one has resided in Canada since the age of 18. A full OAS benefit is paid once the individual has amassed 40 years of Canadian residency since the age of 18. That said, a partial benefit can be paid when the applicant has a minimum of 10 years of Canadian residency (assuming Canadian residence when payments are made) or 20 years of Canadian residency (assuming U.S. residence when payments commence). For more specific details on CPP, OAS and SS, please visit: Cross Border Retirement Income: Canada Pension Plan, Canadian Old Age Security, U.S. Social Security and the Windfall Elimination Provision. The question thus remains, what if I do not meet these eligibility requirements?

This concern marked a call to action and on Aug. 1st, 1984, the birth of the Canada-U.S. Totalization Agreement came to be. There was a subsequent amendment on Oct. 1st, 1997. The manifestation of this Agreement allows an individual to “totalize” their history spent North/South of the border to qualify for U.S. Social Security and/or Canadian Old Age Security. The tallying of cross border residence/work history in tandem, allows the individual to potentially meet their eligibility requirements that would not have otherwise been met if both the U.S and Canadian history stood in isolation from one another. It’s imperative to recognize that although the Agreement tackles the pension (OAS or SS) qualification hurdle, it does not enhance the resulting benefit in question. In other words, your U.S. Social Security benefit will be based upon U.S. work history and Canadian Old Age Security will be centered on the duration of Canadian residence beyond age 18. Let’s look under the hood at a couple of examples.

Mr. Smith, a Canadian citizen and U.S. green card holder, decides to retire in 2019. His career culminates under the following circumstances: thirty years working in Ontario for GM Canada and six years earning gainful employment under GM U.S. in Detroit. Mr. Smith decides to return to his roots north of the border. For simplicity sake, lets assume he has spent forty years in Canada beyond the age of 18 by the time he reaches 65. In this case, he qualifies for a full OAS benefit, a CPP benefit based upon his Canadian earnings record but he does not meet the minimum years of service south of the border to qualify for U.S Social Security. In steps the Canada-U.S. Totalization Agreement allowing Mr. Smith to leverage his CPP credits to make up the 4-year deficit in order to meet SS qualifications. Even though Mr. Smith now qualifies, his SS benefit will be based upon his six-year earnings record vs. the ten-year minimum requirement. Had the “Agreement” not been assembled, Mr. Smith would not have been able to receive any SS benefit.

Let’s turn our attention to how the “Agreement” can play out in a scenario north of the border and continue to call upon Mr. Smith. In this scenario the circumstances are as follows: Mr. Smith is a U.S. citizen and Canadian permanent resident. He has spent all but five years living south of the border and plans to continue Canadian residency north of the border on a go forward basis. As such, Mr. Smith has not met the ten-year minimum residency requirement to receive a partial OAS benefit. In this scenario, the “Agreement” triggers the ability to pull U.S. residence history to bring total residency to the minimum OAS requirement for partial OAS benefits. However, it does not boost the OAS benefit to a higher sum, rather, it simply allows Mr. Smith to qualify to receive an OAS benefit based upon the five years he has resided in Canada since the age of 18. Like the previous example, had the “Agreement” not been made, Mr. Smith would not have been able to breach the qualifications for OAS eligibility.

With this backdrop in mind, how does one apply the “Agreement” to claim their own pension benefits?

The pension plans of Canada and the U.S. communicate with each other quite well. As such, if you live in the U.S. and your desire is to apply for U.S. or Canadian benefits you can visit or write any U.S. Social Security office; or you can apply for Canadian benefits (OAS or CPP) by completing the application form CDN-USA 1 at any U.S. Social Security Office.

If you live in Canada and hope to apply for U.S. benefits simply visit or write to any U.S. Social Security office located near the border.

So where do you find yourself? Are you caught in the middle of this border issue? You are not alone in your quest to comprehend a path forward. With regulations and agreements constantly in flux, its important to examine your options through the lens of current cross border “Agreements”. To find out more, contact Cardinal Point.

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