How to calculate your CPP Post-Retirement Benefit (PRB)
Once you’re receiving your CPP retirement pension, any further CPP contributions that you make won’t affect the amount of your regular pension but they aren’t wasted, because they will earn you CPP Post-Retirement Benefits (PRB).
PRBs will be added to your monthly CPP pension, even if you’re already receiving the maximum CPP retirement amount. The PRB payments will continue for the rest of your life. They are indexed to the cost of living, the same as the regular CPP retirement pension.
Related article: Understanding the CPP Post retirement benefit
What is the basic formula for a PRB?
The calculation of a monthly PRB is determined by the formula:
PRB = ((A / B) x 0.00625 x C x D) / 12
A = The amount of your CPP pensionable earnings (salary or self-employed earnings) for the year. This amount is adjusted if your regular CPP pension started in that year.
B = The Year’s Maximum Pensionable Earnings (YMPE) for that year
C = The five-year average of the YMPE, ending with the year following the earnings
D = The age-adjustment factor. It is a percentage based on your age as of January of the year following the earnings (100% – the number of months until your 65th birthday x the CPP age-adjustment percentage if you are under 65)
How does this formula apply to a specific situation?
Let’s use the example of Erin. She was born in June 1950 and started receiving her regular CPP retirement pension in 2010 at age 60. If she had pensionable earnings of $35,000 in 2013, she would earn a PRB for those earnings.
To determine the amount of her PRB for those 2013 earnings, her factors would be:
A = Her CPP pensionable earnings for 2013 are $35,000.
B = The YMPE for 2013 is $51,100.
C = The five-year average of the YMPE ending with 2014 is $49,840.
D = The age-adjustment factor for Erin as of January 2014 is 89.92% (100% – 18 months until Erin is 65 years old x the 2014 factor of 0.56% per month under age 65).
Inserting those factors into the above formula, we would get her result as:
PRB = (($35,000 / $51,100) x 0.00625 x $49,840 x 89.92%) / 12 = $15.99 monthly
How does this formula change for the year that you start your CPP?
For the year that you start your CPP retirement pension, the complicating factor is determining what amount of pensionable earnings is used to calculate your regular retirement pension and what amount will be used to calculate your PRB.
Under the legislation, your pensionable earnings are used first to calculate your regular retirement pension (for the number of months in the year before the start of your CPP, up to the pro-rated YMPE), and then any balance is used to calculate your PRB.
Let’s use the above example of Erin again, but this time pretending that she started receiving her CPP retirement pension in June 2013 at age 63, instead of at age 60. In this scenario, $25,550 of her pensionable earnings would go towards her regular retirement pension calculation (6/12 x 2013 YMPE of $51,100). The balance of $9,450 would be used to calculate her PRB.
Her 2014 PRB would then be calculated as follows:
PRB = (($9,450 / $51,100) x 0.00625 x $49,840 x 89.92%) / 12 = $4.80 monthly
Is there a way to simplify the PRB formula?
Now that you understand the actual PRB formula from the legislation, I’m going to give you a slightly different version. It gives almost the same result, but may be a bit easier to apply or remember. Let’s try the formula:
PRB = A x B x C
A = The ratio of your pensionable earnings to the YMPE for that year (A/B in the original formula)
B = 1/40 of the maximum age-65 retirement pension for the year following the earnings
C = The age-adjustment factor, based on your age as of January of the year following the earnings (the same as D in the original formula)
If we use the numbers from Erin’s first example above, her factors for this formula would be:
A = Her ratio of pensionable earnings to YMPE would be $35,000 / $51,100 = 68.5%
B = 1/40 of the maximum 2014 age-65 retirement pension of $1,038.33 = $25.96
C = The age-adjustment factor for Erin as of January 2014 is 89.92% (100% – 18 months x the 2014 factor of 0.56% per month under age 65)
Her 2014 PRB would then be calculated as follows:
PRB = 68.5% x $25.96 x 89.92% = $15.99 (the same answer as above)
As you can surmise from my simplified formula, if you were 65 years old in December 2013, a year of maximum pensionable earnings for 2013 would earn you a 2014 PRB of approximately $26.00. It would be correspondingly less or more if you are younger or older than age 65 in December 2013.
The PRB amount will change each year (due to it being based on the five-year average YMPE), but it will always be 1/40 of the maximum age-65 retirement pension for the year following the earnings. This may be all that you need to know in order to estimate your PRB, but I thought that it was also important for you to understand the formula behind that estimate.