WEP Repeal: Great News for Recipients of US Social Security and CPP Benefits

In our cross-border space, the penalizing provision in US Social Security law known as the “Windfall Elimination Provision” (WEP) has always been a thorn in our side. Though not initially designed to punish Canadians, the WEP has, many would say unfairly, imposed a harsh penalty on Canadians receiving private pensions and/or CPP benefits while simultaneously receiving US Social Security benefits: up until now, the WEP imposed a “haircut” on US Social Security benefits for those who received foreign pensions in addition to their Social Security benefits.

The good news is that the WEP is now dead, officially a thing of the past: under the “Social Security Fairness Act” passed into law by President Biden on January 6, 2025 in one of his last acts in office, the WEP (as well as another penalizing provision known as the “Government Pension Offset”) has been repealed, so Canadians can rejoice knowing that they will no longer have their US Social Security benefits reduced as a result of their receipt of CPP and/or Canadian private pension income.

The WEP was first introduced into US Social Security law in 1983 to prevent American retirees with so-called “non-covered pensions” (pensions deriving from income on which US Social Security taxes are not withheld, mainly from state and local government employment, but also from foreign employment) from “double dipping” by getting the benefit of a generous wage replacement under US Social Security while also getting the benefit of their separate non-covered pension.

The theory behind the WEP was that non-covered pension beneficiaries were unjustly profiting from the fact that, on paper, their “covered” wages subject to Social Security tax were being replaced at a higher rate as though they were low-income workers when in reality they simply had income that was outside the net of Social Security. It’s also worth noting here that the WEP only applied to those with more than 10 but less than 30 years of “substantial earnings” under US Social Security.

The crucial point to understand here is that the way the Social Security benefit calculation works, there is a higher wage replacement ratio at the lower end of the income spectrum while those with higher incomes gradually have a lower percentage of their average income throughout their working lives replaced. For 2025, these Social Security wage replacement ratios, known as “bend points,” are the following, used to determine a beneficiary’s PIA (primary insurance amount): a) 90 percent of the first $1,226 of average indexed monthly earnings; b) 32 percent of average earnings over $1,226 up to $7,391; and c) 15 percent of average earnings beyond $7.391. As you can see, there is a far greater wage replacement ratio of 90% at the lower end of the income spectrum, while the replacement ratio drops to only 15% at the higher end of the spectrum. (On average, Social Security benefits are designed to replace around 40% of the average American worker’s income). By benefitting from a higher wage replacement ratio, those with non-covered pensions were benefiting unfairly, so the theory behind the WEP went. However, the impact on Canadian workers was particularly harsh since not only were Canadian private pensions considered in the WEP formula, but so were CPP benefits, thus greatly impacting those who received CPP / Canadian private pensions at the same time as their US Social Security benefits.

The WEP formula imposed a Social Security benefit reduction on beneficiaries also receiving CPP / Canadian private pensions using one of the following 2 methods, whichever was more favourable to the recipient: either a) depending on the number of “substantial earnings” years the worker had under Social Security, a reduction of the wage replacement ratio of the first bend point by up to 50%, which meant a haircut that would have risen to $613 USD a month in 2025; or b) half of the USD-equivalent monthly amount of the foreign pension benefit. This reduction now goes away under the recently passed legislation that repealed the WEP.

The WEP repeal is a cause for celebration for retirees who receive benefits in both Canada and the US who can now receive both countries’ benefits at the same time without worrying about a claw back on their Social Security benefits. The Social Security Administration is still working on the implementation of the repeal, but it appears that, for those who had their benefits reduced under the WEP, there will be a retroactive restoration of payments going back to January 2024.

That said, rarely is anything black and white, so while there will be many people celebrating the WEP repeal, others may worry about the long-term impact to the already strained US Social Security system which will be forced to pay out higher benefit payments now that the WEP is gone but that is a topic for another day.