Looking to retire early? CPP changes may make you think twice

This is a guest post from Cleo Hamel, Senior Tax Analyst for H&R Block Canada

According to recent Statistics Canada numbers, a 50-year-old worker in 2008 expected to stay in the labour force about 3.5 years longer than the same worker in the mid-1990s. But this does not mean we will enjoy fewer retirement years. In 2008, a 50-year-old man could expect to spend 48 per cent of his remaining years in retirement, compared to 45 per cent in 1977 because life expectancy has increased.

Many Canadians think that the Canada Pension Plan (CPP) benefits will replace any missing savings in their retirement years. It is not the case. The CPP is designed to replace about 25 per cent of your average pre-retirement employment earnings, up to a maximum amount. It will not keep you entirely comfortable in your golden years. But recent changes mean more flexibility for Canadians choosing to work a little longer.

Previously, CPP increased retirement pension by 0.5 per cent for each month you delayed the benefit after age 65. So, if you decided to take CPP at 70, your pension was 30 per cent more than it would have been if you took it at age 65. Under the new rules, that same delay will give you a 42 per cent increase. If you are between 65 and 70, still working and receiving CPP retirement pension, you will have the option of not contributing to CPP any longer. But any additional contributions would work to increase your monthly benefit.

Under the old rules, people between 60 and 65 who wanted to start receiving retirement pension early had to stop working for at least two months. It didn’t mean they couldn’t go back to work later but if they did, they didn’t have to resume contributing to CPP. This has changed as well. Now people no longer need to stop working in order to start receiving their retirement pension from CPP. However, if they do continue to work while receiving pension, they will have to continue making contributions. There is no option any longer. The good news is there is a benefit to paying more money into CPP. The additional contributions will increase CPP benefits as part of the new Post-Retirement Benefit (PRB).

But if you want to retire early, benefits are reduced. Under the old system, if you retired at age 60, your pension amount was 30 per cent less than if you had waited five years. Since January 1, 2012, the system will gradually change and the reduction will move from 0.5 to 0.6 per cent per month. It doesn’t sound like much but it means your pension would be reduced by 36 per cent, rather than the previous 30. The implication to your retirement plans depends on how much you plan to rely on your CPP benefit.

People out of the workforce for a number of years will also benefit under the new system. Now you can drop up to 7.5 years of zero or low income earning years from your benefit calculation. So, if you were a stay-at-home mom, family caregiver or you travelled for a period of time, those years can be ignored, resulting in a few extra dollars of CPP.

For more information about CPP, please see .

Written by Guest Contributor

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3 Responses to Looking to retire early? CPP changes may make you think twice

  1. Hello Jim Yih:

    You refer to the maximum benefits and many sources do.

    What are, or where are, minimum benefits to be found???


    • B Lewis

      The amount that you receive from CPP is based on your “average lifetime earnings” up to an established maximum (known as the YMPE for Year’s Maximum Pensionable Earnings.”

      There is no established minimum benefit amount, other than you need to have contributed to CPP for at least one year, on earnings above the YBE (Year’s Basic Exemption). One year of contributions on earnings just over the YBE would result in a retirement pension of approximately $1.15 at age 60, so I guess if there’s a minimum amount, that would be it

  2. Defined Benefit – Cash Balance Plan
    In the past, defined benefit (DB) plans typically fell under a traditional pension plan category, which meant that retirement benefits to be given to an employee were defined on the day of enrolment, generally according to a predefined formula. Cash Balance plans fall under DB plans, but act more like a defined contribution (DC) plan, such as a 401k.
    In a cash balance plan, employees earn a fixed rate of return that can change over time, as interest rates change. This amount is credited on an annual basis to the employees account, even though the money is held separately in a trust. In essence, the value of the cash balance pension plan does not change for the participants, as the underlying investments fluctuate, but is pre-defined. Therefore, it is the employer who bares the market risk and may experience varying contribution levels from year to year based on their underlying investment performance. However, unlike a typical DB pension, the valuation for a Cash Balance plan is based on a worker’s salary on the date of valuation, not on the workers projected final salary, which significantly reduces the employer’s risk of employee longevity.
    Similar to a DC Plan, a Cash Balance plan maintains hypothetical individual employee accounts and are reported to employees along with other retirement savings, which make it very tangible for them to see their benefits.

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