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Ebook: Cross Border Retirement Income: Canada Pension Plans, Canadian Old Age Security…

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

Nest Egg - Canada US Retirement Income

Those who have worked in both Canada and the U.S. may be eligible for Social Security (SS), Canada Pension Plan (CPP) and Canadian Old Age Security (OAS), but it can be complicated. While SS depends on years worked, OAS is based on years of Canadian residency, and CPP is based on contributions. You may be able to take early reduced benefits or delay them to receive increased payouts. There may be clawbacks based on income levels. With SS, the Windfall Elimination Provision (WEP) is a complication that reduces benefits for those receiving foreign pensions like CPP. If you’re affected by WEP, you would be prudent to seek expert advice. Download the Ebook and learn why one should contact a Cardinal Point professional regarding cross-border retirement income.

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Understanding the Canada-U.S. Totalization Agreement

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Many Canadians and Americans face the reality of a career that spans both sides of the 49th parallel. Amidst an era of globalization, it is common for promotions to create cross border opportunities and for company restructurings to force a long-term cross border move. The result of having a career on both sides of the border can lead to some confusion over 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) benefits 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, while a CPP benefit mandates only a single payment into the pension in order to become eligible. OAS criteria follows a different qualification path based upon residency rules vs. work history, specifically, 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. A partial benefit can be paid when the applicant has a minimum of 10 years of Canadian residency (assuming Canadian residence when payments commence) 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 and 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 an individual to potentially meet eligibility requirements that would not have otherwise been met if U.S and Canadian histories 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 your Canadian Old Age Security will be centered on the duration of Canadian residence beyond age 18. Let’s review a few 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 income under GM U.S. in Detroit. Mr. Smith decides to return to his roots back in Canada. For simplicity’s sake, let’s 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 and a CPP benefit based upon his Canadian earnings record, but he does not meet the minimum years of service when he was employed in the United States to qualify for U.S Social Security. In steps the application of 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 existed, 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 slightly different scenario. In this scenario the circumstances are as follows: Ms. Jones is a U.S. citizen and Canadian permanent resident. She has spent all but five years living and working in the U.S. with  plans to continue Canadian residency  going forward. With only 5 years as a Canadian resident, Ms. Jones has not met the ten-year minimum residency requirement to receive a partial OAS benefit.  The Agreement, though, triggers the ability to pull U.S. residence history to bring total residency time to the minimum OAS requirement for partial OAS benefits. However, it does not boost the OAS benefit to a higher amount, rather, it simply allows Ms. Jones to qualify to receive an OAS benefit based upon the five years she has resided in Canada since the age of 18. Like the previous example, had the Agreement not been made, Ms. Jones would not have been able to meet the qualifications for OAS eligibility.

With this scenario 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. can visit or write any U.S. Social Security office to apply for either U.S. or Canadian benefits.

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 unique issue? You are not alone in your quest to find a path forward. With regulations and agreements constantly in flux, it’s important to examine your options through the lens of current cross border agreements. To find out more, contact Cardinal Point.

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

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

Does your or your spouse’s 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 age 65 for people born before 1938, gradually increasing to age 67 for those born in 1960 and later. You can choose to take it as early as age 62, resulting in a 25% reduction in benefits. At a more granular level, the monthly PIA is reduced by 5/9ths of 1% for each of the first 36 months before your 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 maximum increase of 32%.

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

Canadian Old Age Security (OAS)
The rules to qualify for full OAS benefits under the Canadian system are centered on residency in Canada beyond the age of 18, not employment history. 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 age 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 review a few 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 lived in Canada at least 10 years since the age of 18, you are eligible for a prorated OAS benefit.

To take it a step further, let’s assume the same scenario with a bit of 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 item on OAS; if one were to reside in Canada at the time of receipt of the OAS benefit, the individual may be subject to the OAS clawback. This would be created when your income exceeds certain threshold levels. For the 2019 tax year, the OAS clawback kicks in when income exceeds, $77,580. On the other hand, if OAS payments are made to a physical resident of the U.S. – and not a Canadian physical or tax resident – the clawback provisions are eliminated, and the entire benefit is paid to the recipient. No OAS clawback would apply.

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 CPP benefit. This benefit is available at age 65, but 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 clawbacks.

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 individual’s Social Security benefit in the event the recipient was also receiving a foreign pension (e.g. CPP). To understand the “why” behind the WEP, it’s 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 equals the PIA, which is then either increased or decreased depending on when a worker decides to draw SS. 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 conclude 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 someone who spent time working for an employer in Canada, earning CPP credits.

Under the Windfall Elimination Provision (WEP) the calculation for a worker’s Social Security benefit needs to account for the CPP payment. 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.

The U.S. Social Security Administration has an Online WEP Calculator that is available here.

Despite the current provisions of WEP, a U.S. Class Action lawsuit has been filed on behalf of Canadians who receive SS benefits and have been impacted by WEP.  The suit was recently filed in the State of Indiana against the SSA. The crux of the lawsuit is whether the application of WEP against individuals who also receive the same benefits in Canada is lawful.  The Plaintiffs in the Class Action are claiming that the application of WEP to U.S. benefit recipients is unlawful and presents a violation of the plain meaning of the U.S. Social Security Act, U.S. Social Security Act Regulations and the Social Security Agreement (1983-1984) between United States and Canada (the “Social Security Agreement”). The Plaintiffs are seeking retroactive payment of the amounts that have been deducted through the application of WEP and the ending of the application of WEP moving forward.  The claim has been certified but has yet to move forward at the trial court level.

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 your individual circumstances and the potential result of the Class Action Lawsuit. If you think you might be impacted by WEP, we recommend you have a cross border financial planner such as Cardinal Point analyze your situation.