New CPP rules are here

Canada Pension Plan is one of those things that affect every working Canadian and yet it’s really misunderstood.

I was fortunate to be asked to talk about CPP and the new changes happening in 2012 on CBC Radioacross Canada.  The first station was in Windsor. I had to get up at 4:30am to start a 4:40 segment.  I then travelled (by phone) across Canada to talk to 8 different stations for 5 to 10 minute segments.  Thanks to Dagna, Tony Doucette in Windsor, Leigh-Anne Power in Gander, Matt Rainnie in Charlottetown, Terry MacLeod in Winnipeg, Joslyn Oosenburg in Yellowknife, Sandi Coleman in Whitehorse, David Gray in Calgary, Rick Cluff in Vancouver and Terry Seguin in Fredericton for having me on their shows today.

I thought I would share the questions and answers for anyone that might have missed it.

1. What are some of the key changes to CPP this year?

The most positive change is that it’s easier to get more.  Contrary to some people’s belief that CPP will not be there in the future, CPP is well funded and has been preparing for the eventuality that the boomers are all going to retire and drain CPP.  They’ve been building a surplus since 1996 and now have about $150 billion in assets and still growing.  Because of the surplus in CPP, it’s a little easier to qualify for maximum CPP because they can drop out more low-earning years from the calculation.  CPP will be there in the future.

Probably the most talked about change is the ability to take CPP early at age 60 without having to stop work.  In other words, you can be working at 60 and start early CPP if you want but at a reduced amount.  It used to be that in order to collect CPP, you had to STOP WORKING but they’ve eliminated that rule.

As a result, many more Canadians will be eligible to collect CPP early so to deter us all from taking CPP early, they are increasing the reduction for taking it early.  The reduction used to be 0.5% for every month prior to your 65th birthday.  In other words if you were 60 years of age, 0.5% times 5 years times 12 months equals 30%.  At age 60, your CPP income would be 30% lower than your eligible amount at 65.  Under the new rules, they are going to increase the reduction from 0.5% to 0.6%.  That means instead of a 30% reduction at age 60, the reduction will be 36%.

In addition to trying to deter you from taking CPP at age 60, the new rules want to entice you to take CPP later after age 65.  If you decide to take CPP at age 70, they will enhance your CPP by 42%.  In other words, they are dangling this carrot at age 70 to see if you will give up income today to get more in the future.

The last change is the requirement to continue paying into CPP if you working. It used to be that if you were collecting CPP, you did not have to pay into CPP again if you started working again.  Now, all Canadians that work, have to pay into CPP but all contributions go towards increasing future CPP income.  If you work you pay.  If you pay, you will benefit.

2. Who should be paying most attention to these changes?

Because of the increased reduction from 0.5% to 0.6%, Canadians who are turning 60 to 64 this year should really pay attention to these changes because they have a big decision to make . . . Should you take CPP early and start your pension whether you are working or not.  Because they are phasing in the reduction from 2012 to 2016, waiting to take CPP may result in a bigger reduction.

The longer you wait, the more you will lose so you should really think about taking it early and at least run some calculations.

3. When would it make sense to taking it early or hold off on collecting CPP until age 70?

For me, the decision to take CPP early or leave it later is really about life expectancy and what I call the breakeven point.  Generally speaking if you think you are going to live a long life with a longer life expectancy then it may make sense to leave CPP till later.  Mathematically the breakeven point is between age 74 and 77.  If you can tell me EXACTLY when you are going to die then I can tell you EXACTLY whether you should take CPP early or leave it till later.  Here’s the breakeven calculation for 2012:

Related article:  Breakeven points for taking CPP early

Generally speaking I think most people should and will choose to take it early but that’s a generalized statement that does not apply to everyone.  It’s important that you run some calculations and see what makes best sense for you.  Everyone’s situation is different but the math is the math.

4. Overall, are these changes beneficial? (Who wins and who loses out?)

With the new rules, there are both winners and losers.

Obviously one can argue that the people who lose out are the people who were going to retire before the age of 65 and take CPP early anyway. These people will face a bigger reduction under the new rules from 0.5% to 0.6% but at the same time, people who continue working also have the ability to keep paying into CPP to increase the future benefit.

People who were going to continue to work past age 60 now have the opportunity to collect CPP earlier without having to stop work.  That opportunity did not exist without having to stop work for 2 months.

5. What should people consider discussing with their financial planner in light of these changes?

CPP, OAS, and pensions are the foundation of retirement income because they have the ideal characteristics of retirement income – it’s guaranteed, consistent, increases every year and paid for life.

I’m always amazed at how many people have no clue how much CPP they are going get in retirement.  How can you properly plan for retirement income if you have no clue what you are going to get from CPP?  Some people qualify for the maximum benefit of $987 per month.  Others get a lot less.  The average is about $512 per month.  Everyone needs to call Service Canada and get his or her CPP statement of contributions.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

18 Responses to New CPP rules are here

  1. Richard says:

    Re: Breakeven point.

    If you factored the time-value/opportunity costs of receiving CPP earlier, the breakeven months are lower.

    Additionally, you will need to consider the tax bracket of the individual.

    Does OAS clawback consider CPP into equation?

  2. I would personally take CPP out as soon as possible. Think of it this way, you will eventually die, so you should try to enjoy your money now, not later or giving it to someone else, unless that’s your intention.

  3. Great update Jim.

    @Richard Rinyai, I totally agree with you.

    I’ve got 20+ years of work left before I can take CPP. I plan on taking it as soon as I can. This may sound selfish but I’ve earned it and it’s my money.

    @Jim,

    At reduced CPP income, I can start drawning down my RRSP as well, in a lower tax-bracket and moving any monies I don’t expense to the TFSA; maximizing tax-free growth.

    Again, 20+ years down the road but it’s my thinking today as I strategize for tomorrow.

  4. Getting Old says:

    I am 16 months away from my 60th, so have to start learning about my options pretty soon. Thanks for the information, Jim. I am tempted to take the CPP asap. I am a cancer survivor who doesn’t anticipate longevity. My father passed away at 77, also with cancer. My Investment Planner (met with him recently) suggests that the “break-even” occurs at around 82. That is, someone taking a reduced CPP at 60 will have taken the same amount of $ out of CPP at 82 as someone who waits til 65. (Roughly $205,000) Is this about right? Seeing as I can’t figure I’ll get to 82 :(, I might as well take it at 60.

  5. gcctax says:

    For those of us who took (or were essentially forced to take) early retirement at 55, the calculation becomes a comparison between the lesser of two penalties; i) not contributing (significantly) to CPP post-55 and being ground by the non-contributory period exceeding the drop out period and ii) the discount for taking CPP pension early.
    In my case it meant taking CPP no later than 61.

    • Syed says:

      That is a question that will vary ddipneeng on your personal financial information. For most, the Roth would probably be the best vehicle, because of the lower fee structure and the tax-free distributions available after age 59 and a half. However, there are situations in which the 403(b) is also an appropriate vehicle. That is a situation that you should talk to a personal financial advisor so that you can review your overall goals and financial situation and then make an informed decision. It also depends on what funds are available in each. If there are better-suited fund choices in the 403(b) portfolio, then perhaps maxing out the 401-k to the employer’s matching portion is good, then investing the rest into the 403(b) for a more suitable return.Many questions are fairly easy to answer here, but this one requires too much personal information to be given over the internet. Not good.

  6. Mary Melnychuk says:

    What does it mean with the new rules if you are 60 – collecting CPP and working you have to pay into CPP – BUT the good thing is you will collect more? When can one expect your CPP benefit to increase to make up the difference of paying into it at age 60? I thought the amount was fixed once you start collecting. Also I saw a message on the CRA website saying that you can elect NOT to pay CPP when you turn 65. My husband is self-employed and therefore has to pay double CPP so this was bad news for him. Have you heard about this option.

    • Doug says:

      Mary
      You are correct that you will now have to pay CPP contributions if you are 60-65 and still working, even if you are already receiving your CPP retirement benefit. 2012 is the first year that this happens, and your first “post-retirement benefit” (PRB) is supposed to be effective Jan/2013. Realistically, it will probably be June or July 2013 before the government has proof of your 2012 CPP contributions through your tax return, so I woudn’t expect a cheque before then, but it should be retroactive to Jan/13. The same process will occur each subsequent year, with contributions for each calendar year generating a new PRB effective the following January.
      From a rough calculation perspective, each year that you earn at the max YMPE (approx $50,000) will generate a PRB of approx $25/mth (reduced by the normal adjustment factor based on your age when the PRB is effective) starting the following year. If you earned 1/2 of that amount, your PRB would be approx $12.50/mth etc.
      After age 65, it is optional to contribute to CPP as you indicate.

  7. DavBre says:

    I think paragraph 2 may mislead some people. By my calculation, the additional benefit from delaying CPP one month is higher than the increased penalty, with the possible exception of January.
    Also, the phase-in will be complete by 2016, not five years from now!

  8. Lelsey says:

    Even if you are still working, you are better off taking it at 60 and just putting it all into an RRSP.

  9. Nick says:

    The CPP “Drop Out” rate increases to 17% in 2014.

    Does that become effective on January 1, 2014? For a person about to apply for CPP should I then wait until 2014 to take advantage of this. I need all the Drop Out I can get.

    • Nick says:

      After thinking about my own question maybe I’m looking at the date relationship wrong.

      Since I would be applying to take pension in 2014 then I assume that the new 17% “drop out” rate would apply rather than it have anything to do with the date of application.

      • Doug says:

        Nick
        You’re 100% correct that the new 17% dropout rate starts in 2014, and that it is the effective date of the pension that is critical, rather than the date of application.
        If you do want your pension to be effective January 2014 however, your application must be received by Service Canada on or before December 31, 2013.

  10. Dave says:

    A note to others.

    In November I contacted Doug through his website and requested a formal calculation of my wife’s CPP entitlement. and she has now received her first CPP pmt. Doug’s quote which included application of the Child rearing dropout provisions in addition to the general dropout, was spot on … right to the penny.

    I highly recommend http://www.DRPensions.com.

    Dave

  11. Dave says:

    Sorry should be .ca not .com

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