One of the most common questions we receive from cross-border investors relates to how they may reconcile between their CPP and SS benefits. There’s no quick formula to decide how much someone with both CPP and SS credits should receive, but here are some tips and general information:
Canada Pension Plan
The Canada Pension Plan was established to provide a Federal pension for those working Canadians that qualify. Both employers and employees make contributions usually through payroll deductions. Self-employed persons make the aggregate contribution which currently stands at about $4400. Given the present limits, an individual would have to earn about $48,300 per year in order to make maximum contributions to CPP. The intent with CPP is to provide a maximum pension during retirement that would equate to about 25% of your maximum pensionable earnings over the past five years. This works out to $960 for 2011.
Essentially if you contribute to CPP, you will get a pension. The actual amount of pension will be based upon your actual contributions during your working life (age 18 — 65). The CPP will allow you to take the best 40 working years; therefore you could subtract your 7 worst earning years in calculating your pension. CPP is normally collected at age 65 but can be applied for early at age 60, with a reduction.
Employers contribute 6.2% of earnings up to an annual limit based on earnings. This is currently $106,800 for 2011. For this year, employee contribution has dropped to 4.2%. You must contribute a minimum of 40 calendar quarters (10 years) in order to qualify.
Individual SS contributions are typically more than twice that of CPP but the retirement pension is also about double that of CPP. SS aims to replace about 65% of low income earners wages’, and this amount slides down as the salary levels get higher. A higher wage earner would typically have about 25% of the maximum wage base replaced through SS at retirement (about $2100 monthly). SS is typically paid starting at age 62.
The Windfall Elimination Provision
If you contribute between 10 and 30 years, you may be susceptible to some clawback through the Windfall Elimination Provision WEP. This feature of SS is designed to prevent some individuals from “double dipping” from other foreign government pension plans. If you are an expat who has worked in both Canada and the US, and has contributed to both plans, your retirement pension may include amounts from both countries.
For US SS you need to have at least 40 quarters (10 years) of contributions. If you do not, you can apply to have some of your CPP earnings used to calculate your eligibility in the SS plan. If you have worked between 10 and 30 years in either country, then it is not as simple as just adding your CPP and SS entitlements when computing your retirement pension. This is because the US SS administration will “penalize” you because of CPP. Thus you will end up having some of your CPP used as a reduction when calculating your SS pension, thereby reducing your normal SS pension.
An exception to the WEP is the treatment of temporary workers. Such temporary workers can apply to continue making contributions to their home country pension while working in the new country. For example, if you are a Canadian being transferred to work in the USA for 4 years, you could apply to opt out of US SS contributions while working in the US, and rather, have your payroll deductions go towards CPP contributions back in Canada.
For further, detailed information, please feel free to contact the author Paul Bains at firstname.lastname@example.org or at www.crossborderinvesting.com. Paul leads the cross-border practice at Pacifica Partners Capital Management.