Goodbye to IRS

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

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bofafiller
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Post by bofafiller »

While waiting for a bus, the blind man's dog decided to go to the bathroom all over the blind man's legs.A passerby commented to the blind man, "What! That dog just went to the bathroom all over your legs, and you are petting him?! Are you crazy?"To which the blind man replied, "Madam, I am not petting him, I am feeling for his bottom, so I can kick him."
patti
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Post by patti »

Nelsona said: "I think you'll have to wait to see the actual numbers, and how much lawyers will charge for a possible losing battle. makes taking CPP earlier make more sense, though, since CPP will be 'reduced' more by WEP than by taking it early."

So in a situation for someone who accepts WEP (and is not willing to lawyer-up), who does not need the cash flow from either SS or CPP, and expects to live many more years, what is the best strategy to get the most money? For example:

Option 1 - Take CPP as early as possible and delay SS as late as possible.

Option 2 - Take SS as early as possible and delay SS as late as possible.

Option 3 - Take both as soon as eligible.

Option 4 - Delay both to the last possible year.

Option 5 - Take both when they are supposed to be paid.

Option 6 - Other?

I'm sure there are many factors to consider (i.e. tax rates, etc); however, I'm mainly trying to look at this from the standpoint of maximizing total pension payments (at least in part by reducing WEP).

(Note: from playing with the SS calculator on the SSA's website with WEP calculations, it seems that the WEP clawback works out to 50% when you take both pensions when normally paid. It seems that the WEP clawback is much higher than 50% when you delay SS and much lower than 50% when you take SS early. I find this odd since the WEP provisions are supposed to guarantee no more than a 50% haircut on CPP.... or at least that's what I thought.)
nelsona
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Post by nelsona »

WEP cannot be more than 50 percent, so the calculator is not correct.

I've always been a firm believer in earlier the better.

But with WEP, I'm 100% sure taking ealier your CPP earlier than SS is the only way to go.
The only thing you want tp watch is that you want to get the spousal SS as soon as possible too.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
exPenn
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Post by exPenn »

I have done similar calcualtions for my wife (but haven't covered all the scenarios you list). In her case, in order to maximize her total government pensions, she will be taking CPP (and OAS) at 65 and SS at 66. Even with WEP, this gives her a larger pension than taking either CPP or SS earlier (even when calcualted in constant dollars). I haven't done the calculation for delaying CPP or SS beyond the normal retirement ages
Your numbers will depend on your particular case. In my wife's case, she accumulated SS credits before moving to Canada. Since she is no longer contributing to SS, the only variable is the annual Cost of Living Adjustment. The SS calculator does a good job of projecting future base SS payments (either in future or constant (2014) dollars), but it doesn't seem to work with the WEP included. You can trick it into working by only running it as though you are just about to retire. i.e. if you want to find how much the WEP would be at age 62, enter your birthdate as though you are now 62, and want to retire at 62. and run the calculator with and without WEP. In our case the WEP consis,ently comes out to 1/2 CPP.
The Service Canada CPP calculator is fairly useless since it only tells you what your CPP would be if you are curently 65. I wrote my own spreadsheet to project her future CPP (It correctly predicted my CPP to within a few $ 5 years in advance). She expects to keep working and contributing to CPP until 65, so her CPP will go up every year, even in constant $. Since the WEP only takes away 1/2 of any increase, her net pension will still increase by waitting. If you intend to stop contributing to CPP before 65, this could change, because your base CPP (before any reduction for early retirement) can actually decrease if you stop contributing but don't retire.
Of course, if you do not take CPP or SS early (e.g. at 60 and 62), you are also foregoing all the pension money you would have recieved in those 5 or 4 years. Some would agrue that the best thing is to take your pension as soon as possible, and if you don't need the money, invest it, and that will more than make up for your reduced pensions. That is a personal decision.
patti
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Post by patti »

So if you take CPP as early as possible (60) and SS as late as possible (70), the advantage is that you would have 10 years of collecting CPP without any WEP. Right?

Of course CPP would be a reduced payment due to early retirement. Then at age 70, you would receive a higher SS (due to late retirement) reduced by a lower WEP (50% of the lower CPP from early retirement).

I find it strange that the SS calculator would not work. I used the calculator labelled as the "WEP version" so it seems to be specifically designed for this purpose. But it very clearly calculates a WEP haircut of greater than 50% when retirement age increases towards 70 (and you have a relatively small monthly CPP).

ExPenn - Please try the following... re-run your numbers using a SS retirement age of 70 and a small CPP (say $100/month). I think you will find that the WEP clawback (compared to $0 CPP) works out to $62 (or 62%).
nelsona
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Post by nelsona »

Even without WEP, early CPP was always better. It is not as good now with the change in incremental differnces by waiting, but not enough to change the equation. WEP makes it even better to go ealy, since CPP is effectually cut in half.

OAS on the other hand may have advantages in wating, particularly if you are subject to clawback (US residents of course would not be subject to clawback). and WEP has no affect.

The decision, as expenn points out should not be based on neot needing the money, it should be based on what will get you the most money reasonably soonest.

I have a thread on the keats forum that ran numbers on this...
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
exPenn
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Post by exPenn »

Patti: I will crunch the numbers when I get a chance. One possibility is the following: Both SS and CPP are increased each year by a Cost of Living Adjustment. For its projections, SS assumes a COLA of about 2.6% per year over the next 10 years. The WEP projection may be assuming that you are receiving a CPP of $100/mo at age 60, and that it will also increase at a 2.6% COLA. If you inflate $100 by 2.6%/year for 10 years, it becomes $129, and 1/2 of that, rounded off, is your WEP of $62.
nelsona
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Post by nelsona »

If you've been follwing the threads at keats, you will know that WEP is calculated ONCE, in the first month that one recieves both SS and foreign pension.

Incredibly, there is no further adjustment for currecy fluctuation, nor COLA for the foreign pension.

This has hurt those who had WEP applied when the C$ was at par or higher a few years ago. They are getting dinged evey month on a CPP that is now nowhere near the USD value it had at that time.

You want to run projections without COLA in any event, since you want numbers in today's value.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
exPenn
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Post by exPenn »

OK. I ran the SS WEP calculator using my wife's earnings history and her birthdate (she is currently 61) with a foreign pension of $100/month. Here are the results: If she starts taking SS at 66, the calculated WEP in 2014$ is $50, i.e. 1/2 the $100 CPP. However, in future $ (age 66, 2019$), the WEP becomes $55. If she starts taking SS at 70, again with a $100 pension, the WEP in 2014$ comes out to $66, while in future $ (age 70, 2023$), the WEP comes to a whopping $82 !

Here is what the calculator seems to be doing. For the age 66 calculation, it seems to assume that you are currently receving a foreign pension of $100, and that it will increase with a COLA of 2.6% per year for the 4 years between current age 61 and age 66, becoming about $113 in 2019, so the WEP in future $ is 1/2 $113, or about $56. (SS may assume a more complicated COLA that varies from year to year but is about 2.6% on average).

For the age 70 calculation, if you delay taking SS until age 70, your base SS in constant $ is 32% greater than your age 66 base amount. For some reason, the calculator assumes your $100 foreign pension also increases by 32% by age 70, even in constant 2014$, becoming $132, so the WEP is 1/2 $132 = $66. This is absurd. The calculator is clearly doing something wrong. For age 70, in future $, it assumes the $100 foreign pension becomes $132 which is then inflated by 2.6% / year for the 9 years from age 61 to 70, becoming about $166, so the WEP is 1/2 $166 = $83.

The next time I'm running this calculator and the little window comes up asking for feedback to SS I will point out that their WEP calculator is clearly wrong. It should have a provision for inputing your estimate of what your monthly foreign pension will be at the time when you intend to start taking your SS, since this is the number that will be used to calculate your WEP.

I think that you can safely assume that your WEP will never be greater than 1/2 your CPP.
nelsona
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Post by nelsona »

and, as I pointed out earlier, there is no cola or currency fluctuation once wep is determined.

Why does one need a ss calculator. As I said in determining "how much" you will get, all you need is current values.
COLA will take care of itself.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
patti
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Joined: Sun Apr 24, 2011 7:28 pm

Post by patti »

ExPenn - Thanks for running those numbers. I think we have arrived at the same conclusion. The WEP calculator only provides sensible results when you retire at your scheduled retirement age (66 in your wife's case, 67 in mine).

The only troubling part about this is that just because the WEP calculator's results don't make any intuitive sense (to us) doesn't mean it's not correct! Is it possible that the "guarantee of no more than 50% WEP" is based on the assumption that you retire as scheduled? After all, WEP is supposed to remove the portion of the SS formula that subsidizes workers that do not have substantial earnings. Retiring at 70 increases your SS payments so why wouldn't it further "eliminate your additional windfall" from collecting a grossed-up SS in addition to CPP?
nelsona
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Post by nelsona »

Please read the note on the bottom of the max wep chart (upon which the calculator is based):
http://www.ssa.gov/retire2/wep-chart.htm#table
*Important: The maximum amount may be overstated. The WEP reduction is limited to one-half of your pension from non-covered employment.

SSA admits that their chrts (and calculator) exagerate the effects of WEP.

I did an analyisis of the effects of WEP on the decision to push out CPP. taking SS at 67.

First, without WEP. compare CPP at 60 65 and 70.

The break-even point for waiting til 65 is 74. After 74, you made a good decison by waiting.
Th break-even pont for wiating until 70 for CPP is 78

So, put in other terms, if you choose ealy CPP, ypu are a winner for 14 years over those delaying until 65 or later, but in the next 4 years those who waited til 65 or 70 begin to pass you until at 78, you are losing out.

However if you factor WEP into it (SS at 65), the break-evenyears beome 80 and 83!
So, if you take CPP at 60 and are affected by WEP at 65, you are a winner for 20 years over someone who waits til 65!

I haven't performed the analysis for diffrnt SS dates, but the one for 65 is eye-opening.

The point is, regardless of when you take SS, WEP tends to push out your break-even year by quite a lot. those affected by WEP are even better off taking CPP earlier than those not affected by WEP,
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
exPenn
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Post by exPenn »

Now I understand the age 70 WEP calculation. According to the SS website "The Windfall Elimination Provision (WEP) reduces your Eligibility Year benefit amount before it is reduced or increased due to early retirement, delayed retirement credits, cost-of-living adjustments (COLA), or other factors." In other words, when calculating your age 70 benefit, they first apply the WEP to your age 66 benefit, then gross up the difference by 32% i.e. SS(70) = (SS(66) - WEP) X 1.32. This effectively increases your WEP by 32%, just as predicted by the calculator.
Another disincentive to delaying your SS.
nelsona
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Post by nelsona »

But WEP is only calculated in the first month that you collect BOTH SS and the foreign pension.

And, once again, the overrding principle is that WEP can NEVER decrease your SS by more than 1/2 of your foreign pension.

That is the ultimate override.

The chart even says so.

So the program is only accurate if you are not being held back 50% (which is always possible if the SS years are approaching 30). It simply doesn't matter what formula comes up with, the WEP will ALWAYS be knocked back down to 50% foreign pension.

I don't think THAT is a disincentive for delaying SS.

But it certainly makes taking CPP earlier the wise choice.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
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Post by nelsona »

http://www.ssa.gov/retire2/wep-examples.htm

Even after giving examples of how the planner calculator works, SSA adds this:

However, the total WEP reduction is limited to one-half of the pension based on the earnings that were not covered by Social Security.

Strange that such a simple override would not be part of the software.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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