Qualifying for Both Social Security and CPP - What You Need to Know

Written by Carson Hamill CIM®, CRPC®, Associate Financial Advisor & Assistant Branch Manager & Dean Moro BComm, CIM®, Associate Portfolio Manager

The question often arises for Canadians who have worked in both Canada and the U.S.: What is the best approach for collecting benefits from both the CPP and Social Security? Which factors need to be considered, and is there a preferred order for claiming these benefits? What is the Windfall Elimination Provision (WEP) and how do I utilize both Social Security and CPP payments? This blog seeks to shed light on these queries and offer guidance.

• Navigating CPP and Social Security
• Can You Collect Both SSN and CPP?
• Windfall Elimination Provision (WEP)
• Similarities Between SSN and CPP
• OAS (Old Age Security) for Canadians
• Receiving OAS and CPP Payments in the U.S.
• Other Considerations
• When To Begin Receiving Benefits
• FAQ

Navigating CPP and Social Security

Given that many Canadian residents reside in close proximity to the U.S. border, it's typical for Canadians, dual citizens, and U.S. citizens living in Canada to have made contributions to both the CPP and Social Security. Canada and the U.S. have a separate agreement alongside our tax treaty concerning these pension programs. If you've contributed to both pension plans, you may qualify for benefits from both.

In Canada, a single contribution to the CPP renders you eligible for a pension. This means that even a brief period of employment in Canada can result in eligibility for CPP benefits later in life. The amount of pension benefits received is based on factors such as the individual's total contributions to the CPP over their working years, and the age at which they choose to start receiving benefits. Conversely, in the U.S., eligibility for a pension necessitates contributing to Social Security for 40 quarters, or 10 years.

Under the Canadian agreement, individuals who lack sufficient credits for U.S. Social Security can apply for the pension plan using a combination of U.S. and Canadian credits. To have Canadian credits considered, you must have accrued at least six work credits (equivalent to approximately 1.5 years of work) under the U.S. system. To paint a picture, imagine you have two sets of LEGO blocks, one set at home and one at your cousin's house. If you want to build a big castle, you need blocks from both sets. But to use the blocks from your cousin's set, you must first build a small tower with your blocks at home.

The Canadian agreement also stipulates that Social Security credits accumulated after 1965 may be included in your CPP work credit calculation, if necessary, to satisfy the minimum criteria for CPP survivor or disability benefits. Eligibility for this benefit necessitates earning at least one year of credit under the CPP. To simplify - in Canada, if someone worked and earned some pension credits, but not enough for benefits, they can also use credits earned from working in the U.S. after 1965.

Can You Collect Both SSN and CPP?

You can indeed receive both Social Security Numbers (SSN) and Canada Pension Plan (CPP) benefits. However, it's crucial to be aware that if you're receiving benefits from both plans, your Social Security benefits may be decreased.

Windfall Elimination Provision (WEP)

Allow us to introduce the Windfall Elimination Provision (WEP). The Windfall Elimination Provision (WEP) empowers the Social Security Administration to diminish your retirement benefits if you received a pension from an employer that didn't withhold Social Security taxes. While the CPP is subject to this provision, Old Age Security (OAS) is exempt. The WEP applies to pension recipients who turned 62 or became disabled after 1985. Though the WEP calculation is intricate, you don't need to handle it yourself. Our international agreement facilitates communication between the two pension systems, allowing them to exchange information. They'll coordinate and inform you of the outcome.

Here's an example to help you grasp what that means. Imagine you have two jars for treats - one from your school and another from your grandma. Your school jar is for snacks you earn from doing chores, but your grandma jar is for special treats she gives you. Now, let's say your school jar doesn't have enough snacks, so you start taking some treats from your grandma’s jar. But then, your grandma says you can't take as many treats from her jar because you already have some from school. That's a bit like the Windfall Elimination Provision (WEP). It's basically a rule that says if you already have treats from one place, you can't receive as many treats from another place.

But don't worry, grown-ups will figure it out and make sure you get the proper amount from each source. Keep in mind that your CPP and/or Social Security benefits will differ based on your contributions to each pension plan.

Similarities Between SSN and CPP

Social Security and CPP share several similarities:

• Both offer full benefits at a set retirement age.
• In Canada, full benefits can be received at age 65, while in the U.S. it's age 67 for those born after 1960.
• Both offer reduced benefits if you choose to retire early, with Canada allowing you to retire as early as 60, and the U.S. allowing retirement as early as age 62.
• Both also offer increased benefits by delaying retirement income from either source until as late as age 70.

OAS (Old Age Security) for Canadians

What about OAS for Canadians? If you've resided in Canada for a minimum of 10 years upon reaching 65, you'll qualify for at least a partial OAS benefit. After accumulating 40 years of residence, you’ll be eligible for full benefits at age 65. Keep in mind, OAS benefits may be income tested and could be subject to a partial or full clawback. While proof of residence in Canada isn't always required upon application, Service Canada may request it at a later date. It's advisable to gather any documentation demonstrating your residency just in case it is required.

Receiving OAS and CPP Payments in the U.S.

Yes, you can receive both Old Age Security (OAS) and Canada Pension Plan (CPP) payments while living in the United States if you qualify for these benefits. The Government of Canada typically continues to pay OAS and CPP benefits to Canadian citizens who reside outside of Canada, as long as they meet eligibility requirements.

It's important to notify Service Canada about your change of address to ensure that your OAS and CPP payments are sent to your new location. Additionally, both OAS and CPP benefits may be subject to withholding tax if received outside of Canada, as per the prevailing tax treaty between Canada and the U.S. It's advisable to consult with a tax professional or Service Canada for specific guidance regarding your situation.

Other Considerations

Canada operates a comprehensive social security system that is funded through taxes on employee wages. Americans residing and working in Canada may find themselves obligated to contribute to this system in certain scenarios. Thankfully, the US-Canada totalization agreement clarifies the terms under which expatriates must make contributions, preventing double payments.

Here's how it breaks down:

• If you are employed by a US company in Canada for less than five years, you will contribute to the US Social Security system.
• If your employment with a US company in Canada exceeds five years, you will contribute to the Canadian social security system.
• If you are employed by a Canadian company in Canada, your contributions will go towards the Canadian social security system.

When To Begin Receiving Benefits

The crucial question arises: When should you start each pension? This decision hinges on your unique financial needs, overall income plan, tax situation, and, naturally, your preferences. It's advisable to consult with your cross-border financial advisory team to discuss the pros and cons of each scenario thoroughly.

FAQ

QUESTION: What happens if I do not have 40 credits for social security?

ANSWER: If you don't have enough credits (40 credits) to qualify for Social Security benefits on your own work record, you may still be eligible for benefits based on a spouse's or ex-spouse's work record, provided certain conditions are met. This is often referred to as spousal or survivor benefits. Additionally, even if you don't qualify for Social Security benefits, you may still be eligible for other forms of assistance, such as Supplemental Security Income (SSI), depending on your financial situation and other factors. It's recommended to contact the Social Security Administration directly or consult with a financial advisor for personalized guidance based on your specific circumstances.

QUESTION: Can I continue to work while receiving Social Security?

ANSWER: If you continue to work while receiving Social Security benefits before reaching full retirement age, your benefits may be reduced if your earnings exceed certain thresholds. For individuals who have not reached full retirement age, there's a limit to how much you can earn before your benefits are reduced. In 2024, for example, the earnings limit is $19,560 per year ($1,630 per month). If you earn more than this limit, Social Security will deduct $1 from your benefits for every $2 you earn above the limit.

However, it's important to note that once you reach full retirement age, there's no earnings limit, and you can continue to work and receive your full Social Security benefits without any reduction. Additionally, withheld benefits due to excess earnings are not lost permanently. Your benefits will be recalculated once you reach full retirement age.

QUESTION: Is Social Security adjusted for inflation?

ANSWER: Social Security payments are adjusted annually for inflation. The increase for 2024 is 3.2 per cent. The increase for 2023 was a much larger 8.7 per cent due to the high rate of inflation.

In Summary

Both Canada and the United States offer generous Social Security benefits for those who have resided and/or worked in their respective countries. And for those who have worked in both countries, benefits can be received from both, and credits can be applied to enhance their pension benefits. As always, it is important to consult with an experienced cross border professional to discuss your situation, and to reach out to the appropriate government authorities to understand your entitlements.

Next Steps

If you are planning on moving to Canada and need assistance with your investments, estate planning, and portfolio management, please call or email us at Snowbirds Wealth Management, as we specialize in cross-border financial planning and wealth management. We work closely with experienced cross-border lawyers and accountants to ensure you have a team behind you.

About Snowbirds Wealth Management

Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro and Carson Hamill, associate portfolio managers with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.

To schedule an introductory call, please click here.

Statistics and factual data and other information are from sources RJLU believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJLU is to be under no liability whatsoever in respect thereof.