New proposed changes for CPP

On May 25, 2009, Federal, provincial and territorial Ministers of Finance recommended changes to the Canada Pension Plan (CPP).

(note: All levels of government have discussed this proposal and on December 15, 2009, these changes became law with the passing of Bill-C51. Most of the changes will come into effect on January 1, 2012. )

The proposed changes are intended to modernize the plan to better reflect the many different paths people take to retirement today. The proposed changes will provide greater flexibility for older workers to combine pension and work income if they wish; modestly expand pension coverage; and improve fairness in the Plan’s flexible retirement provisions. The proposed package is affordable within the current CPP contribution rate of 9.9% on earnings up to average wages and could improve the long-term sustainability of the Plan.

Canadians need to be aware of these changes because it affects everyone in the work world especially those planning to retire around 2011.

1. Elimination of the stop working rule. Currently In order to collect CPP, you must be at least 60 years of age and have stopped working or reduce your earnings for 2 months. The proposal is to remove the requirement to stop working and allow any Canadian to elect CPP as early as age 60. I like this change because the current rules were confusing and open to abuse. Many people were playing games and able to collect CPP early anyways. It just makes sense to eliminate the rule.

2. Increase the reduction of early CPP. Currently, those that take CPP early can do so but at a reduced rate of 0.5% for every month prior to your 65th birthday. For example at the age of 60, the reduction would be 30%, which is 0.5% x 60 months. Under the proposed changes, the reduction would increase to 0.6% for every month prior to your 65th birthday, which would result in a 36% reduction. Obviously, this change is meant to deter people from taking CPP early, which under the current rules make a lot of sense to do so. Even with the new reduction rate of 0.6%, the breakeven calculation suggests that taking CPP early probably still makes the most sense most of the time. The breakeven point moves from age 77 to age 74. For more information on this refer to a previous article I wrote.

3. Increase the enhancement for collecting CPP after age 65. In order to try and entice people to delay taking CPP early, not only are they proposing to apply a bigger reduction to taking it early, the proposal calls for an enhancement of the benefit for those planning to delay CPP. The enhancement would be 0.7% for every month after your 65th birthday. In other words if you waited till 70 to collect CPP, you would get a 42% increase (0.7% x 60 months). I don’t know if I would go for this deal. You have to live a pretty long time to make up all the CPP you left on the table for the last 10 years. I’m not sure I would wait around for this enhancement so this change does not entice me at all.

4. Contributions to CPP while working. Currently, those who collect CPP and then return to work do not have to pay into CPP. Once you collect a CPP benefit you never have to contribute into the CPP plan again. With the new proposed changes, not only will you be able to collect CPP while you are working but you will have to continue to make contributions into CPP as long as you are working under the age of 65. These contributions will result in increased retirement benefits, including persons already receiving the maximum pension amounts. After the age of 65 contributions into CPP will be optional. Although I would prefer to see the current system remain unchanged where contributions stop once you collect CPP, I do understand why this change makes sense.

5. Increase the low earning drop out. This change probably has the greatest universal affect on Canadians but the degree of change itself seems pretty insignificant. Currently, Canadians who retire at 65 can drop out 7 of their low earning years out of the total 47 years (from age 18 to 65) you were eligible to contribute to CPP. This drop out allows Canadians to remove years where they went to school or took time off or were unemployed. Under the new rules, the proposal is to increase the drop out period. But before you get too excited, the plan is to increase the drop-out to 7.5 years in 2012 and 8 years in 2014. According to the information paper circulated by the government, “This change would benefit virtually all CPP contributors and improve their basic retirement pensions.” While this is true, I’m not too excited about counting my pennies.

My two cents.

Overall, I think changes to CPP are in order. The current rules need to be ‘modernized’. My favorite change is the elimination of the ‘stop working for two months’ rule because it was a confusing rule and was not enforced properly anyway.

In my professional work, I felt it was in most people’s interest not to defer a pension. For most people, taking CPP early has more advantages than delaying it. Under the new rules, I’m not sure the outcome of may analysis changes much even though you will get less at 60.

I think people who are turning 60 in the next couple of years before the implementation of these new rules will have to look really hard at whether it is to their advantage to take CPP before the new rules and get grandfathered under the old rules or wait and take CPP under the new proposed rules.

Other relevant articles

Child Rearing Drop Out Provision
Will CPP Be there when you retire?
How to get CPP early?
Lots to know about Canada Pension Plan (CPP) – CanadianFinanceBlog.com
The Four Most Common Questions about Canada Pension Plan (CPP) – CanadianFinanceBlog.com

What do you think about these proposed changes?

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.

25 Responses to New proposed changes for CPP

  1. sylvania p. arruda says:

    hi i am going to be 55 on july 22/2011 i am right now on social services i was just wondering if i would be able to apply for my cpp benefits . thank you

    • Jim Yih says:

      Nope! The earliest you can apply is age 60. Only 5 years to go!
      Jim

      • Doug says:

        Sylvania
        The exception to Jim’s answer would be if you are not working now due to a disability. In that case there would be no age restriction to receiving your CPP.

  2. TTH says:

    My financial advisor does not think it is advisable for me to apply for my CPP at 65 since I am still working. After reading your various articles, I decided to apply at age 65. Is it mandatory that I inform my employer to stop deducting my CPP this year when I collect my CPP and continue deducting next year as an optional requirement?

  3. Paul O'Keefe says:

    My husband turned 61 in April 2011. In Januay 2012 can he apply for CPP Benefits and still remain working with his employer. He would still make his Cpp contributions. He is not ready to retire and is in great health.

    • Jim Yih says:

      Yes he can apply for early CPP and remain working. He will have to pay into CPP while working. Any contributions will increase future CPP income.

  4. Coll says:

    My husband is collecting CPP disabilty. He is trying to get back into the workforce. Will he have to make CPP contibutions while on CPP disabilty?

  5. Ron says:

    Hi Jim:
    I like your explanations but I’m still not sure about this situation. Let’s say I work from age 20 to age 55, contributing the max. Then I retire in 2015 and live off my investments. At age 60, I apply for CPP. I will lose 0.6% x 60 months = 36%. Will I lose even more for only contributing 35 years and then contributing zilch for 5 years? And if so how much?
    Thanks, Ron

  6. Jim Yih says:

    Yes, you are correct. To get the max, you need 40 years of contribution at maximum. All you have to do is call Service Canada and tell them you plan to retire at 55 and will not contribute for the last 5 years. They can estimate how much you will get but my rough number would suggest 87.5% of max less the 36%.

    the other thing to consider is that even starting to work at 20 does not necessarily mean you contributed the max in every year. The best thing to do is get your CPP statement of contributions.

    Good luck!
    Jim

    • Ron says:

      Thanks Jim!
      Now you’ve answered my question, put your feet up, have a tea, call it a day. The rest can wait:)
      Cheers,
      Ron

      • Doug says:

        Ron/Jim
        Just to clarify, you only need 40 years of max earnings to get the max CPP if you apply at age 65. If you apply at age 60, your contributory period is only 42 years, and by the time you claim your 15-17% dropout, 35 years of max earnings will basically qualify you for a max (reduced) retirment pension.

  7. Frank La Face says:

    Jim:
    Im continuing to work until the end of 2012. Im 65 this Dec. 12, 2011. Im not recieving CPP yet. I was planning to start Jan 2013. Should I apply now, or wait. my finance advisor says wait, I will recieve more.I’ve contributed to CPP since I was a teen, no intruption to speak of. Have I waited to long? Please advice.

    Thank you,sicerily;
    F.La

  8. Stephen says:

    Here is a situation not found on any CPP age 60 or wait talk. A member of the military I have to retire at age 60. I have 5 years left to 65. Yet in finding a job chances are the salary will be less than when required to retire. Therefore the earnings calculated for CPP may well be effected negatively by the lesser income. On top of that there is the issue of the Bridge Benefit we are locked into. With the new rules, by taking CPP at age 60 when required to retire, I lose 37% of the value of my CPP at age 65. If CPP is taken at 60, the effect on the bridge benefit lowers the combined CPP/ pension amount significantly at 65.

  9. Shirley says:

    I have been collecting CCP for 3 years and still working what is the benifit for me to contribute more to CCP re: the new laws

    • Jim Yih says:

      Every dollar of contribution goes to increasing your lifetime income. However, if you are already at the max CPP, it may not increase your CPP past the maximum. This would be the same whether you were working in retirement or working before retirement. Whether you agree with it or not, you really have no choice.

      • Doug says:

        Shirley/Jim
        My understanding is that the new Post-retirement benefit (PRB) for those who contribute to CPP after starting their retirement pension is payable even though someone might already be receiviing the max CPP benefit. It doesn’t affect the average lifetime earnings and won’t be relected in death or survivor benefits, because it’s paid as a separate benefit.

  10. Rudi Klassen says:

    I retired at 55 but started my CPP at 60, two years ago. Today I have limited self employment ($10,000-15,000 annually) and plan to be till 65 to top off my Company pension and CPP. I have the feeling that my self employment income could be severely diminished by mandatory CPP contributions under the new rules. At that level is it worth continuing self employment? Thanks!

    • Doug says:

      Rudi
      A bit of a tough question from a CPP perspective, but the biggest question might be whether or not you need the $10,000-$15,000 of income.
      Strictly from a CPP perspective, you don’t contribute on the first $3,500 of income, so self-employed earnings of $10,000 would cost you CPP contributions of $643.50 (($10,000-$3,500)x9.9%) and self-employed earnings would cost you CPP contributions of $1,138.50 (($15,000-$3,500)x9.9%). On the benefit side, each year of max contributions is worth about $25/mth in Post-retirement benefits(PRB) IF you were age 65. Since you’re under age 65, that amount is reduced by the actuarial factor based on your age in January of the year following when you make contributions (confused yet?). In very rough calculations, self-employed earnings of $10,000 in 2012 would generate a PRB to you of approx $4.40/mth effective Jan/13, meaning that it would take about 12.2 years to recoup your contribution of $643.50. If your self-employed income were $15,000, it would generate a PRB for you of approx $6.50/mth, requiring a makeup period of approx 14/5 years. Does this help?

  11. Joan says:

    I will be 65 in July of this year (2012). I started collecting CPP when I was 60. Am I to understand that I will have to contribute to CPP on money I make until July? Is there a grandfather clause on this change?

  12. Trishanne says:

    I have started collecting my pension payments, but asked the CPP Review board to reconsider my application for CPP splitting from my ex-husband. There is a trial case which challenges the “cut-off date” for applications, as unconstitutional-type situation.
    I am wondering…now I receive a total, CPP and OAP of 1045. Will I really receive any more if I do finally receive the pension share?

    • Doug says:

      Trishanne
      It is impossible to give you an answer to your question without knowing what your and your ex-husband’s UPE was during the period of time that you lived together. Another factor that could come into play is whether you had any children during the marriage, and if so whether the Child Rearing Dropout applies to you.
      What “cut-off date” are you referring to?

  13. doug tresieera says:

    i will take my old age pension 2013, will turn 65 feb 16 2013, I will stell work , make $89,000,00 a year , how much will it affect my cpp and oap ,

  14. stuart says:

    I took cpp at 60, four years after retiring from my hospital job.I am now 64.I have a one person company (me) and I claimed my $16,000 per year income as management fees(all the money the company makes is basically mine).Then the rules changed and I had to treat it as employment income and,of course, I had to pay both employer and employee contributions. Last year I paid $900 and my income from cpp has gone up by $6/month – I will be 77 before I break even!

    When you have answered this I will give you an even more amazing example of how I have been ripped-off by cpp over the years.

  15. Morgan says:

    Hi :)
    I am all ready on the CPPD .. when i hit 65 will they drop my payment amount? I am under the impression that it was to just roll over to CPP at the age of 65.

Leave a reply

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Headline Name: Email: subscribed: 0 We respect your privacy Email Marketingby GetResponse