Case Studies: Social Security, WEP, and CPP

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exPenn
Posts: 99
Joined: Tue Aug 20, 2013 3:06 pm
Location: GTA

Case Studies: Social Security, WEP, and CPP

Post by exPenn » Fri Aug 09, 2019 10:49 am

My wife is an ex USC (renounced in 2013) who has lived in Canada since 1987. She recently applied for her US Social Security, (and my Spousal Benefit) and because she has been receiving her CPP since last year, she was subject to WEP. During this process, I learned some surprising things about how SS applies WEP in practice that I would like to share with followers of this forum.

As most are aware, if you have less than 30 years of substantial earnings under SS, and you are receiving a foreign pension such as CPP, your SS benefit will be reduced by the Windfall Elimination Provision (https://www.ssa.gov/pubs/EN-05-10045.pdf ). The amount of the reduction depends on your work record (your number of years of substantial earnings) and your Eligibility Year (ELY) when you first became eligible for SS benefits. The maximum reduction due to WEP is shown in a chart (https://www.ssa.gov/planners/retire/wep-chart.html ). The WEP booklet also contains the following statement:

“A Guarantee: We won’t reduce your Social Security benefit by more than half of your pension for earnings after 1956 on which you didn’t pay Social Security taxes.”

Most people would take this to mean that the actual reduction in your benefit due to WEP (i.e. the difference between the benefit you would have received if not subject to WEP, and the benefit you actually receive after WEP is applied) would not be greater than 1/2 the CPP you are receiving. This is not the case. SS applies this CPP/2 cap to the actual WEP amount they use to calculate your benefit. As pointed out on the SS website (https://www.ssa.gov/planners/retire/wep.html ), regardless of when you apply for SS, this WEP amount is always subtracted from your ELY benefit BEFORE it is reduced or increased due to early retirement, delayed retirement or Cost of Living (COLA) adjustments. This can result in your actual reduction in benefit being less than, but in most cases greater than CPP/2.

This can be illustrated by the following case studies. These examples agree with the examples presented on the SS website, and with the results of the SS Online Calculator (https://www.ssa.gov/planners/retire/AnypiaApplet.html ), without and with WEP. They also agree with our experience in applying for and receiving our benefits.

Assume the applicant was born in 1953, so he reaches his Full Retirement Age (FRA) of 66 in 2019.
He first became eligible for benefits at age 62, so his ELY = 2015.
Assume his full ELY benefit (i.e. the benefit he would have received if he were 66 in 2015) was $800 US.
In each case, we assume his monthly CPP was $500 Can.
SS uses the US Treasury exchange rates which are listed every quarter (https://www.fiscal.treasury.gov/reports ... rrent.html ).
Currently, $1 US = 1.3090 $ Can, so in each case we assume his CPP = $382 US, and CPP/2 = $191.

Case 1: ELY Benefit
Suppose the recipient applied for his SS benefit in 2015 as soon as he was eligible, and reported a CPP = $500 Can.
With no WEP, his full benefit in 2015 was $800, but since he was only 62, his benefit is reduced by 25% due to early retirement, so his no WEP benefit as received would be $800 X 0.75 = $600.
With WEP, his full ELY benefit is first reduced by WEP = CPP/2, so his net full benefit is $800 - $191 = $609. This is then reduced by 25% for early retirement so his WEP benefit as received is $609 X 0.75 = $457.
His actual reduction in benefits due to WEP is then $600 - $457 = $143.
$143 = $191 X 0.75 = CPP/2 X 0.75, so the actual reduction is 25% less than CPP/2.

Case 2: FRA Benefit
Suppose the recipient waits until Full Retirement Age of 66 in 2019 to apply for SS, and again reports a CPP of $500 Can.
In 2015 his full benefit was $800. SS benefits are increased every year by a Cost of Living Adjustment. A list of historical SS COLA’s is available at https://www.ssa.gov/oact/cola/colaseries.html . From 2015 to 2019 the total Cost of Living increase is 1.000 X 1.003 X 1.020 X 1.028 = 1.05, i.e. a cumulative COLA of 5%.
Therefore, his FRA benefit with no WEP would be $800 X 1.05 = $840.
To calculate his benefit with WEP, SS again goes back and subtracts WEP = CPP/2 from his ELY benefit, even though this is his 2019 CPP amount. This makes no logical sense, because he may not have even been collecting CPP in 2015, but that is how the calculation is done.
With WEP, his ELY benefit = $800 - $191 = $609. This is then brought forward to 2019 by the cumulative COLA of 5%, so with WEP his FRA benefit is $609 X 1.05 = $639.
His actual reduction in benefits due to WEP is $840 - $639 = $201.
$201 = $191 X 1.05 = CPP/2 X 1.05, so the actual reduction is 5% greater than CPP/2.
This is the situation that my wife was in (but with different numbers). Her reduction in benefits was 5% greater than we expected. We were fortunate that this is a period of relatively low inflation (there was zero COLA from 2015 to 2016). If inflation were higher the extra reduction could be much greater.

Case 3: Age 70 Benefit
Suppose the recipient waited to apply until 2023 when he was age 70 in order to maximize his SS. He again reports a CPP of $500 Can.
The SS online calculator assumes a cumulative COLA of 11% from 2019 to 2023 (i.e. 2.45% per year for 4 years).
With no WEP, his full benefit in 2023 would then be $840 X 1.11 = $932.
Because he has delayed retirement, this benefit is increased by 8% per year = 32%, so his no WEP benefit as received would be $932 X 1.32 = $1,230.
With WEP, SS again goes back and subtracts WEP = CPP/2 from his ELY benefit, $800 - $191 = $609. This is brought forward to 2023 as $609 X 1.05 X 1.11 = $710.
This is then increased by 32% for delayed retirement so with WEP his Age 70 benefit as received would be $710 X 1.32 = $937.
The actual reduction due to WEP is $1,230 - $937 = $293.
$293 = $191 X 1.05 X 1.11 X 1.32 = CPP/2 X 1.54, so the actual reduction is 54% greater than CPP/2. This is an excellent reason, if an additional one were needed, to not delay taking your SS if you are subject to WEP.

In my wife’s case, the extra reduction on top of CPP/2 was only $10 US per month, so it is not worth fighting over. Nevertheless, I believe an excellent case could be made that Social Security’s statement that “we won’t reduce your Social Security benefit by more than half of your pension” is at best misleading.

Andreww
Posts: 3
Joined: Tue Mar 27, 2018 3:21 pm

Re: Case Studies: Social Security, WEP, and CPP

Post by Andreww » Fri Aug 09, 2019 6:18 pm

Thank you very much for sharing your thorough analysis with this community.

My strategy to minimize the WEP is to take CPP at age 60 and SS at 70. My CPP is now only $USD 220/month and the SS will be $USD 3300/month. Based on your analysis, I estimate that the WEP cost should be about $110/month.

Again, thank you for sharing your analysis -- it is the most thorough, well written and understandable I have seen on the WEP!
Keep up the great work!

exPenn
Posts: 99
Joined: Tue Aug 20, 2013 3:06 pm
Location: GTA

Re: Case Studies: Social Security, WEP, and CPP

Post by exPenn » Sat Aug 10, 2019 7:57 am

Andreww:
For a more accurate estimate, I suggest you use the Social Security online calculator with WEP ( https://www.ssa.gov/planners/retire/anyPiaWepjs04.html ). It takes a bit of work because you have to manually enter your SS earnings record. If you are still working, you will need to estimate any future earnings up until age 70, and you will need to estimate what your CPP benefit will be when you turn 70 (in US $).

CdnAmerican
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Joined: Tue Aug 30, 2011 12:15 am

Re: Case Studies: Social Security, WEP, and CPP

Post by CdnAmerican » Mon Aug 12, 2019 7:19 pm

exPenn - Thanks for this really useful analysis! I had misinterpreted the statement about half of the pension; I thought SSA was referring to have of my Social Security, rather than half of my CPP. That's very helpful.

I have a couple of lingering questions:
1) I had heard that Cdn earnings could be credited towards one's SS earnings under the Tax Treaty. This seemed a bit too good to be true, but I don't really know. Did your wife count any of her Cdn earnings towards her SS?
2) If you get SS before getting CPP, then does WEP still come into effect immediately? I had wondered about taking SS first, before I took CPP, so that WEP wouldn't come into effect at first, but don't know if that's really how it works.

I wonder if there are any professionals who do these calculations. I usually take a DIY approach but feel like this is quite complex - and something you only get one shot at ..
Not a professional opinion.

exPenn
Posts: 99
Joined: Tue Aug 20, 2013 3:06 pm
Location: GTA

Re: Case Studies: Social Security, WEP, and CPP

Post by exPenn » Tue Aug 13, 2019 8:33 am

To answer your questions:
1) Actually its not the Tax Treaty. There is a separate US-Canada Social Security Agreement (https://www.ssa.gov/international/Agree ... ml#monthly ). You need at least 10 years of earnings under Social Security to get an SS benefit. If you have less than 10 years (but more than 1 1/2 years) of SS credits, you can count some of your years of paying CPP towards the 10 years needed for SS eligibility. You transfer only the credit for the CPP years, not your CPP earnings. Your SS benefit will still be based only on your US earnings on which you paid SS taxes. By the way, if you have less than 10 years of SS earnings, you are not subject to WEP.

2) WEP is not applied retroactively. WEP is applied on the first month in which you receive both an SS and a CPP benefit. If you are receiving SS benefits, one of the things you are required to notify SS about ASAP is "if you start receiving a retirement or
disability pension from a job for which you did not pay Social Security taxes" (https://www.ssa.gov/pubs/EN-05-10077.pdf ). Technically, this includes any company pension you are receiving in Canada, as well as CPP.

CdnAmerican
Posts: 218
Joined: Tue Aug 30, 2011 12:15 am

Re: Case Studies: Social Security, WEP, and CPP

Post by CdnAmerican » Tue Aug 13, 2019 5:40 pm

Thanks again exPenn! that is good to know about SS benefits if you have between 1.5 and 10 years of credits. That's the boat we are in; I have > 10 years, but my wife has less. If hers would not be subject to WEP, then going that route might actually be better for us.

YHou mentioned that technically, one needs to let SS know once you start receiving another pension. I had read somewhere that a Cdn company pension does not impact WEP. Maybe they still require notification, even if it doesn't have an impact?
Not a professional opinion.

exPenn
Posts: 99
Joined: Tue Aug 20, 2013 3:06 pm
Location: GTA

Re: Case Studies: Social Security, WEP, and CPP

Post by exPenn » Tue Aug 13, 2019 6:21 pm

As far as I know, a Canadian company pension would contribute to WEP. Note that there is a maximum dollar amount for WEP (https://www.ssa.gov/planners/retire/wep-chart.html ), so even if you have a large company pension plus CPP, WEP cannot totally wipe out your SS benefit. I just found this website that discusses several strategies (https://retiremitten.com/social-securit ... n-pension/ ), although with 2 people to consider, it becomes even more complicated.

formerpatriot
Posts: 37
Joined: Mon Feb 23, 2015 4:13 pm
Location: Montreal

Re: Case Studies: Social Security, WEP, and CPP

Post by formerpatriot » Wed Aug 14, 2019 7:41 am

exPenn:
Please send me a private message if you can.
FormerPatriot in Montreal

exPenn
Posts: 99
Joined: Tue Aug 20, 2013 3:06 pm
Location: GTA

Re: Case Studies: Social Security, WEP, and CPP

Post by exPenn » Wed Aug 14, 2019 9:39 am

Can't see how. Don't think private messaging has been enabled on this forum.

formerpatriot
Posts: 37
Joined: Mon Feb 23, 2015 4:13 pm
Location: Montreal

Re: Case Studies: Social Security, WEP, and CPP

Post by formerpatriot » Wed Aug 14, 2019 10:12 am

exPenn:
You should join the Financial Wisdom Forum and share your "Case Studies: Social Security, WEP, and CPP" post over there.
Or, if you prefer, allow me to copy your post to the FWF (and I'll give credit to "exPenn from the Serbinski forum").
FormerPatriot in Montreal

exPenn
Posts: 99
Joined: Tue Aug 20, 2013 3:06 pm
Location: GTA

Re: Case Studies: Social Security, WEP, and CPP

Post by exPenn » Wed Aug 14, 2019 10:40 am

formerpatriot:
Go ahead.

exPenn
Posts: 99
Joined: Tue Aug 20, 2013 3:06 pm
Location: GTA

Re: Case Studies: Social Security, WEP, and CPP

Post by exPenn » Wed Aug 14, 2019 3:32 pm

formerpatriot:
From your previous posts, I can see that you are in a similar situation as me and my wife. If you have not applied for SS yet, here are some tips:
1) Start early. Our experience was a 4 month odyssey through the twists and turns of SS bureaucracy too numerous to relate here.

2) SS will not accept photocopies. Be prepared to send your original paper documents (birth certificates, marriage certificates, proof of CPP/QPP payments ) through the mail or courier to the SS Office of International Relations in Baltimore.

3) I see your wife has also renounced her USC. Our claims were held up because we had not changed my wife's citizenship status on her SS record. This is one of the things you are supposed to keep SS apprised of. At the time, we were concerned with changing her status with the State Dept. and the IRS, and did not consider SS. Since we were unwilling to send her COLN and Canadian passport through the mail, we drove across the border to the nearest SS office and did it in person. Had we known, we would have taken care of this long before applying for SS.

CdnAmerican
Posts: 218
Joined: Tue Aug 30, 2011 12:15 am

Re: Case Studies: Social Security, WEP, and CPP

Post by CdnAmerican » Wed Aug 14, 2019 6:19 pm

I couldn't find the article which indicated that a private pension doesn't affect WEP, but found this one which kind of intimates the same thing: https://www.fool.com/retirement/2018/06 ... efits.aspx . It seems that if one's employment is subject to SS tax (or, presumably, CPP), then a private pension which is generated in addition to CPP/SS is not subject to WEP. But, this seems far from definitive. You are right in that it probably doesn't matter too much, given that WEP has a max reduction. Thanks again!
Not a professional opinion.

exPenn
Posts: 99
Joined: Tue Aug 20, 2013 3:06 pm
Location: GTA

Re: Case Studies: Social Security, WEP, and CPP

Post by exPenn » Wed Aug 14, 2019 6:51 pm

I believe you are misreading that article. It was written for an American audience and it assumes that if you are receiving a “private” pension, it comes from employment with an American private company and you paid Social Security taxes on the income from that employment. On the other hand, if you are receiving a “public” pension, you worked for a public sector employer in the US and you likely did not pay SS taxes on that income. That is the critical point. WEP is applied on any pension from employment on which you did not pay SS taxes. This includes CPP and any pensions from either private or public sector employers in Canada. The fact that you paid CPP taxes on your Canadian employment is irrelevant to Social Security.

formerpatriot
Posts: 37
Joined: Mon Feb 23, 2015 4:13 pm
Location: Montreal

Re: Case Studies: Social Security, WEP, and CPP

Post by formerpatriot » Sun Aug 18, 2019 1:52 pm

exPenn:
Thank you for the tips.

We live in Quebec. The Quebec "Bureau de la Retraite" can do all the paperwork for us when it's time to apply for U.S. Social Security benefits. They recommend that we apply 4 to 6 months in advance (i.e. 4 to 6 months prior to desired benefit starting date).

As you know, my wife renounced her U.S. citizenship in 2018. Last February she filed her last tax return with the IRS, including Form 8854. All is well with the State Department and with the IRS. I was not aware that she has to inform the Social Security Administration that she is no longer a U.S. Citizen. Is it stated somewhere on the Social Security website?
FormerPatriot in Montreal

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