Julia Chung, co-founder and chief executive officer, Spring Financial Planning Inc., Vancouver.JESSICA VENTURI/Supplied
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This is the latest article in an ongoing series, Planning for the CPP, in which Globe Advisor explores the decisions behind when to take CPP benefits and reviews different aspects of the beloved and often-debated government-sponsored pension plan.
As part of this ongoing series, we invite readers to ask questions about their Canada Pension Plan (CPP) retirement benefits and find experts to answer them. This week, Julia Chung, co-founder and chief executive officer of Vancouver-based Spring Planning Inc. and president of the Financial Planning Association of Canada, answers questions about those eligible for the CPP in Canada and Social Security in the U.S.
Many Canadians who have worked in Canada and the U.S. are eligible for both the CPP and Social Security benefits. What’s the best strategy for collecting both of them and what factors need to be considered? For instance, should one be taken before the other? It’s my understanding that Social Security payments are generally higher than CPP due to the Windfall Elimination Provision (WEP). I would love to hear more about this and other issues for retirees eligible for CPP and Social Security benefits.
As most Canadian residents live very close to the U.S. border, it’s common that Canadians, dual citizens, and U.S. citizens living in Canada will have contributed to both the CPP and Social Security.
Canada and the U.S. have, in addition to our tax treaty, an agreement regarding these pensions. If you’re really into reading international agreements, you can find some information about it here.
If you’ve contributed to both pension plans, you may be able to collect both. In Canada, if you’ve contributed to the CPP at any point – even once – you’re eligible for a pension. In the U.S., if you’ve contributed to Social Security for 40 quarters or 10 years, you’re eligible for a pension.
Our agreement allows those who don’t have enough credits for U.S. social security to apply for the pension plan based on both U.S. and Canadian credits. To have Canadian credits counted, you must have earned at least six work credits (estimated at 1.5 years of work) under the U.S. system.
Our agreement also provides that Social Security credits earned after 1965 may be considered along with CPP work credits, if required, to meet the minimum requirements for CPP survivors or disability benefits. You must have earned at least one year of credit under the CPP for this benefit.
If you’re collecting both Social Security and CPP benefits, your Social Security income might be reduced. The WEP, which you can read about here, allows the Social Security Administration to reduce your retirement benefits if you “earned a retirement or disability pension from an employer who didn’t withhold Social Security taxes.” The CPP falls under this provision but not Old Age Security (OAS). The WEP applies to those pension recipients who reached 62 or developed a qualifying disability after 1985.
The WEP calculation is pretty complex; luckily, you aren’t required to do it. Our international agreement allows the two pensions to contact each other and share information. They’ll connect and let you know how it works out.
Of course, that might not be helpful if you’re trying to plan out your retirement. The SSA’s website provides calculators that will help you estimate your benefit, and there’s a specific calculator just for the WEP.
Whether your CPP or Social Security will be higher depends on your contributions to both pension plans. Even after the WEP is applied, many of my clients still receive a greater monthly benefit from their Social Security than their CPP.
Social Security and CPP are similar in a few ways: Both provide a full benefit at a specific retirement age. In Canada, that’s 65. In the U.S., if you were born after 1960, the full retirement age is 67. They also both provide a reduction if you decide to take your pension earlier, with Canada allowing as early as 60 and the U.S. allowing as early as 62. You can also increase your benefit by deferring your pension income from either source as late as 70.
When to start each pension will be based on your individual financial needs, your overall income plan, your tax situation, and, of course, your preferences.
For those of us who have spent part of our careers in the U.S. and paid into Social Security, and part in Canada, paying into the CPP in Canada, what provisions do we need to take when we file for both?
Before filing for pensions, the most important thing is to look at what you want and need for your retirement years. Working with a professional finance team, including a financial planner and an accountant, who understand cross-border planning and pensions is key.
Your team should help you create a long-term income strategy that identifies when it makes sense to start each pension, what you can expect to receive, and what the income tax implications might be. If you’re a U.S. citizen, you must file returns in both countries, as the U.S. requires tax filings based on citizenship, not residency. Thanks to our tax treaty, most U.S. citizens living in Canada don’t have to pay income taxes in the U.S., but those citizens do have to file U.S. taxes annually, regardless of how much or where their income is earned. Generally, that means those citizens pay a lot in professional fees, even if they’re not paying U.S. income taxes. It’s frustrating.
Once you have determined the best approach for you with your team, you’ll be well-equipped to apply for your pensions. What surprises many people is the aforementioned WEP. So, it makes sense to understand what that provision means to you and your long-term plan.
It’s also worthwhile to look into whether your spouse (if you have one) might be able to receive a spousal pension. Some non-U.S. spouses can receive a spousal pension, which can feel like a windfall, especially after that elimination provision. However, there’s an entirely different provision, called the Government Pension Offset, that might reduce spousal or survivor benefits, so there’s more calculating to do before we start celebrating that win.
While this wasn’t asked specifically, residency in Canada does matter when it comes to OAS. If you’ve lived in Canada for at least 10 years by the time you reach 65, you’ll qualify for at least a partial benefit. If you’ve got a full 40 years by 65, you’ll qualify for the full benefit before factoring in the income test or clawback. You don’t necessarily have to give proof of your residence in Canada when you apply, but Service Canada might request it later. I always recommend you dig up any paperwork that proves your residence, just in case you’re asked.
If you have any CPP questions, please e-mail us at globecpp@gmail.com and we will try to answer as many as possible in the next few weeks. Answers will appear on Tuesdays.
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