The Windfall Elimination Provision (WEP) Has Been Officially Repealed!
Our cross-border clients will be happy to hear that on January 5th, 2025, the bill to repeal WEP was signed into law.
What is WEP?
The Windfall Elimination Provision (WEP) is a formula used to adjust Social Security benefits lower for people who receive “non-covered” pensions (i.e. pension benefits that accrued while NOT contributing to Social Security) such as CPP and Canadian employer pension plans.
WEP can cause a reduction to your Social Security retirement benefit of up to 50% of the non-covered pension amount, up to US$587 per month or US$7,044 per year as of 2024. For example, an individual receiving CAD$15,000 (~US$10,500) in CPP benefits could see their Social Security benefit reduced by up to ~US$5,250 per year due to WEP. WEP occurs when you are receiving both a Social Security retirement benefit or disability benefit as well as a non-covered pension amount and did not rely on the Canada-US Totalization Agreement to qualify for U.S. benefits. WEP also affects those who are receiving spousal Social Security benefits because those benefits are dependent on the primary earner’s Social Security retirement benefit. For some households, WEP could have reduced household Social Security benefits by as much as US$10,566 each year! For an in-depth discussion of WEP look here.
HOW DOES REPEALING WEP AFFECT RETIREMENT INCOME PLANNING?
For our cross-border clients, the Steele Wealth Management team provides guidance to coordinate Canadian and American social benefits to maximize annual after-tax income and overall lifetime benefits. In the past, we delved into the impact of WEP for the unique retirement situation of each client.
Generally, pre-WEP repeal, the best course of action to maximize retirement benefits was to take non-covered pensions like CPP and Canadian employer pensions early and delay taking Social Security retirement benefits until age 70, depending on retirement income needs and health status. This would limit total WEP and maximize combined benefits assuming one did not decease well before their life expectancy. Now that WEP has been repealed, there is no longer an overwhelmingly compelling reason to start your CPP benefits or Canadian employer pensions early nor start your Social Security retirement benefits late. The decision of when to start these benefits/pensions is now nearly identical and is dependent on each individual’s retirement income needs, retirement date, risk tolerance and health status. In other words, the decision of when to start CPP or Canadian employer pensions and Social Security benefits for previously WEP-affected persons is now similar to the decision faced by those not affected by WEP, such as US-only or Canada-only individuals.
Those Already Receiving Social Security Retirement or Spousal Benefits
Those who are receiving Social Security retirement or spousal benefits who were previously affected by WEP will see their benefits increase in the coming months. Better yet, the bill to repeal WEP is retroactive back to benefits received in January 2024. Those who were affected by WEP and received Social Security retirement, disability or spousal benefits since January 2024 will receive a lump-sum amount for past benefits lost to WEP.
Updates to your Social Security benefits will be posted on your ‘my Social Security account’ which can be accessed by going to https://www.ssa.gov/myaccount/.
Those Yet To Start Social Security Retirement or Spousal Benefits
For those who would have been affected by WEP in future, WEP repeal will affect your projected retirement income and/or your projected estate value. It may also change how (in the case of spousal versus retirement Social Security) and when to start your Social Security, CPP and Canadian employer pensions (if applicable).
If you are near retirement and are considering starting your Social Security or other government benefits or pensions, give the Steele Wealth Management team a call to discuss your options given the new considerations regarding WEP repeal.
Still Plenty of Planning To Do!
While WEP repeal simplifies retirement income planning for those affected by WEP, there is still plenty of planning to do to maximize retirement income and/or estate values! Carefully coordinating government benefits and employer pensions with the drawdown of retirement and non-retirement assets is key to maximizing retirement income as well as your estate for your beneficiaries. WEP repeal will result in somewhat higher Social Security benefits in some cases and may allow for higher levels of available income in retirement and/or increase expected estate values which may require additional planning in terms of gifting and taxation.
We look forward to entering this new post-WEP repeal planning phase with you! Give your Steele Wealth Management team a call – We can help!
