5 Changes to CPP Retirement Benefits and How They Affect Canadians

The Government of Canada has stated that the long term sustainability of the Canada Pension Plan (CPP) is threatened by increasing demands being placed upon it. Consequently, ongoing changes to CPP are being implemented in an effort to alleviate that concern. This article focuses on these changes and how they affect Canadians.

Maximum Pension Amount

The CPP provides a monthly retirement pension to contributors. In 2013, the maximum amount, when applying at age 65, is $1,012.00 per month ($12,144.00 per year).

What Changes to CPP are Being Made?

The following information, obtained from the Service Canada website, outlines 5 major changes to CPP retirement pensions.

1.   The monthly pension amount will increase by a larger percentage if you take it after age 65.

Before the changes to CPP, your pension increased by 0.5% for each month after age 65 (and up to age 70) that you delayed receiving it. This meant that, if you started receiving your CPP pension at 70, your pension amount was 30% more than it would have been if you had taken it at 65.

From 2011 to 2013, this percentage will gradually increase from 0.5% per month (6% per year) to 0.7% per month (8.4% per year). This means that, by 2013, if you start receiving your CPP pension at age 70, your pension amount will be 42% more than it would have been if you had taken it at 65. These increases stop at age 70 so there is no financial benefit in further delaying your pension.

2.   The monthly pension amount will decrease by a larger percentage if you take it before age 65.

Before the changes to CPP, your pension was reduced by 0.5% for each month before age 65 that you began receiving it. This meant that, if you started receiving your CPP pension at 60, your pension amount was 30% less than it would have been if you had waited to take it at 65.

From 2012 to 2016, this early pension reduction will gradually change from 0.5% to 0.6% per month. This means that, by 2016, if you start receiving your CPP pension at age 60, your pension amount will be 36% less than it would have been if you had taken it at 65.

3.   Contributions to the CPP while receiving a CPP retirement pension have changed.

Before the changes to CPP, if you were receiving a CPP retirement pension and working, regardless of your age, you did not pay CPP contributions.

As of 2012, if you are under 65 and you work while receiving your CPP retirement pension, you and your employer will have to make mandatory CPP contributions. These contributions will increase your CPP retirement benefits. If you are age 65 to 70 and you work while receiving your CPP retirement pension, you have the option of making CPP contributions, which will increase your retirement benefits.

4.   The number of years of low or zero earnings that are automatically dropped from the calculation of your CPP pension will increase. This drop-out period is intended to compensate for periods of unemployment, illness and schooling.

Before the changes to CPP, when calculating your average earnings over your contributory period, 15% of your lowest earnings were automatically dropped. This is called the “general drop out provision”, which allowed up to 7 years of your lowest earnings to be dropped from the calculation.

As of 2012, the percentage of low earnings increased to 16%, and up to 7.5 years of your lowest earnings can be dropped from the calculation, which will likely increase your benefit amount. In 2014, the percentage will increase to 17% and, with these changes to CPP, up to 8 years of your lowest earnings can be dropped from the calculation.

5.   You will be able to begin receiving your CPP retirement pension without any work interruption.

Prior to the changes to CPP, to receive a pension before age 65, you had to either stop working or significantly reduce your earnings for at least a two month period, the month before receiving the pension and the month in which it started.

Starting in 2012, you are able to take your CPP retirement pension as early as age 60 without having to stop working or reduce your earnings.

Retirement Planning

These changes to CPP may affect your retirement planning, including when you decide to apply for your CPP retirement pension. How these changes affect you will depend on various factors, such as your age, your employment history, and when you plan to retire. In addition to the CPP, there are several other sources of retirement income that must be considered in your retirement planning, including Old Age Security (OAS) pension, employer pension, and personal investments.

See my related article, “Applying for Canada Pension Retirement Benefit: 7 Factors to Consider”.

For detailed information on changes to CPP as well as all other aspects of the CPP, visit the Service Canada website at www.servicecanada.gc.ca

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