The Child Rearing Dropout (CRDO) provision of the Canada Pension Plan (CPP) isn’t an actual paid benefit, but it’s an important provision nonetheless. While it’s generally helpful, its impact isn’t always fair. This article is the third and final article of a three part series. In case you missed it, here are the first two articles:
- The Good of the CPP Child Rearing Dropout Provision
- The Bad of the CPP Child Rearing Dropout Provision
Part III – The Ugly
The impacts of the CRDO provision are downright ugly when it overlaps with another provision of the CPP, known as credit splitting, or more properly, as Division of Unadjusted Pensionable Earnings (DUPE). Most people know this as CPP splitting or sharing.
Related article: The difference between CPP Splitting and Pension Splitting
Although both provisions are generally positive on their own, they were definitely not designed to work together. I call this situation the CRDO/DUPE overlap issue.
The DUPE provision could probably justify an article on its own, but for now let’s just say that a DUPE applies when a couple separates or divorces, and the outcome of the DUPE is an “equalization” of the unadjusted pensionable earnings (UPE) of the former couple for the entire period of the relationship, including any period of CRDO eligibility.
The result of this “equalization” of UPE only, while ignoring the value of the CRDO, is that the CRDO-eligible spouse has an advantage over the other spouse when their benefits are calculated. Also, this situation often results in a net loss of benefits to the “couple”, with a corresponding savings to the CPP fund. I’ll deal with each of these aspects separately below.
How does the CRDO provision interact negatively with the DUPE provision?
As mentioned above, a DUPE equalizes the UPE for the entire period of the relationship, including any period of CRDO eligibility. As you might remember if you read my article on how to calculate a CPP retirement pension: CPP benefits are calculated on the basis of “average lifetime earnings” after applying the various dropout provisions.
If two people have identical UPE records (such as after a DUPE) but one of them can drop out more of the low earnings, that person’s benefit will likely be greater (it can never be lesser).
Let’s look at an example that demonstrates this point!
Doug and Judy, were married for 30 years, from age 18 until age 48, at which time they separated and divorced. They had two children, born 3 years apart. Judy is thus eligible to claim the CRDO for the 10-year period starting from the month following the birth of the first child through until the month that the second child turned seven years old.
Doug made maximum CPP contributions for the entire 30-year period of the relationship and he continued doing so until he retired at age 57.
Judy worked part-time making half-maximum CPP contributions for the first 10 years of the marriage. She stayed at home raising the children for the next 10 years. She then started working full time and made maximum contributions until age 57, when she also retired.
Judy applied for a DUPE, and the result was that their UPEs were shared equally for the 30-year period of their relationship. By coincidence, they also had identical earnings and contributions after the relationship ended, and they both applied for their CPP retirement pension at age 65.
The following chart shows this earnings scenario and resulting CPP benefit eligibility:
|Doug’s UPE||Judy’s UPE||Doug’s UPE||Judy’s UPE|
|10 years from age 18 to 28||100% Max||50% Max||75% Max||75% Max|
|10 years of CRDO from age 28 to 38||100% Max||Zero earnings||50% Max||50% Max|
|10 years from age 38 to separation at age 48||100% Max||100% Max||100% Max||100% Max|
|9 years from age 48 to retirement at age 57||100% Max||100% Max||100% Max||100% Max|
|8 years from age 57 to 65||Zero earnings||Zero earnings||Zero earnings||Zero earnings|
|CPP retirement pension using 17% dropout only||100%||61.5%||80.75%||80.75%|
|CPP retirement pension using 17% and CRDO dropouts||n/a||78.15%||n/a||86.3%|
How then does the CRDO-eligible spouse have an advantage over the other spouse?
Based on the above chart, you can see that Doug’s post-DUPE CPP retirement pension will be 80.75%, because he is not eligible for the CRDO provision.
Without the CRDO provision, Judy would have the same post-DUPE entitlement as Doug, but her CPP retirement calculation rises to 86.3% as a result of being able to drop out those 10 extra years under the CRDO.
The end result is that Judy’s CPP retirement pension is 6.9% greater than Doug’s, even though they have identical UPEs for their entire 47-year contributory period. The cause is that although the DUPE equalizes their UPEs, it allows Judy to retain sole access to the CRDO provision.
How does the CRDO/DUPE overlap issue create a net loss of benefits to the “couple”?
Looking again at the above chart, you can see that their total pre-DUPE eligibility was 178.15% (Doug 100% and Judy 78.15%), whereas their total post-DUPE eligibility is only 167.05% (Doug 80.75% and Judy 86.3%).
This means that the net impact of the DUPE was a loss of 11.1% of a maximum CPP retirement pension, or approximately $112 monthly. If they lived to the age of 82, this would amount to approximately $23,000 in lost benefits.
What can be done about the CRDO/DUPE overlap issue?
DR Pensions Consulting offers a service in which we can calculate the impact of a credit split in advance. If a credit split will produce a fair and equitable result, then that is the best option. If not, we can generally recommend an alternative that would produce a fair result and maximize CPP benefits for the “couple”, instead of creating a net loss of benefits to them.