Clients who worked stateside long enough to qualify for U.S. social security will now get the benefits they’re entitled to, with no reduction based on their Canadian pension benefits.
This week, the U.S. Social Security Fairness Act was officially signed into law, removing the windfall elimination provision (WEP), in place since 1983. From a Canadian perspective, the WEP often lowered the U.S. social security benefits of cross-border workers, given their Canada Pension Plan (CPP) or Quebec Pension Plan benefits.
With the WEP gone, U.S. social security benefits will be restored retroactively as far back as January 2024, for those eligible.
“You’re going to get what you’re entitled to,” said Carson Hamill, an associate portfolio manager with Snowbirds Wealth Management, Raymond James Ltd., in Coquitlam, B.C. “You’re not going to be handcuffed.”
To collect U.S. social security, taxpayers require 40 credits, which generally translates to 10 years of working in the States.
The WEP elimination is also expected to increase the U.S. social security benefits of about three million Americans with private or other pension benefits.
A KPMG article noted that the new legislation is controversial, because of the risk it presents to U.S. social security’s solvency. “Congress will likely need to expedite reform efforts in the wake of the law being enacted,” the article said.
A projected shortfall for U.S. social security is based on demographics, said Andrea Thompson, a financial planner and founder of Modern Cents in Mississauga, Ont. U.S. social security predominantly relies on payroll deductions from the existing workforce to fund benefits. While CPP operates under a different system, clients can still be concerned that demographic shifts will affect those benefits, she said.
To address that requires “understanding the nature of the types of pensions and how they’re structured and whether or not [clients’] concerns are founded,” Thompson said. “That’s something we discuss with our clients.”
When planning for clients, she is reducing annual U.S. social security benefits by 21%, based on U.S. research including projections from the Congressional Budget Office.
Hamill said people are eager for details about the WEP elimination. “Some of our clients, even prospects, are calling me saying, ‘When can I expect my additional money?’” he said.
The U.S. government is evaluating how to implement the act.
Thompson said an unknown is whether the rules will be different for U.S. residents versus non-residents. “That hasn’t been clarified yet,” she said.
She added that more social security changes could be on the way. For example, Trump campaigned on eliminating taxation of social security.
“That would be costly … for the U.S.,” Thompson said. “From a Canadian perspective, it’s unclear whether that change would impact Canadians or whether the [Canada Revenue Agency] would continue to tax [social security benefits].”
Currently, under the Canada-U.S. tax treaty, taxpayers can claim a deduction of 15% of U.S. social security benefits.
“You would hope that if the U.S. makes any major changes, that based on our tax treaty [with the U.S.] we would follow suit,” Thompson said. “But we really don’t know.”
“From a planner’s perspective, there are so many changes,” she said, referring to evolving taxation and legislation. As a result, financial planning must be ongoing.