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.