Changes to the Canada Pension Plan (CPP)
On December 15, 2009, several changes to the Canadian Pension Plan (CPP) recommended by federal, provincial and territorial governments became law with the passing of Bill C-51. The new rules, which will begin being implemented as of January 1, 2011, will gradually restore the pension adjustments for early and late CPP take-up, remove the work cessation test, mandate plan participation for working beneficiaries under age 65 and enhance the general drop-out provision.
The following are the highlights of the changes to the CPP:
Changes to the actuarial factor for early and late retirement
The actuarial factor is the adjustment made to retirement benefits based on whether a person retires before or after age 65. If a person retires before age 65, the factor lowers the retirement benefits as that person will likely collect benefits for a longer period of time and has contributed for fewer years than someone who retires at age 65. On the other hand, if a person retires after age 65, that factor increases retirement benefits as that person will collect benefits for a shorter period of time and has made additional contributions.
The adjustments for early and late retirement will be changed gradually in order to restore actuarial fairness. The objective is to further increase the pension for those who start receiving the retirement benefit after age 65, and further reduce it for those who start receiving benefits before age 65.
The changes in the pension adjustment will be phased in gradually over a number of years starting in 2011 and will be at their actuarially fair levels by 2016.
CPP retirement benefits will be higher if taken after age 65
Previously, CPP retirement benefits increased by 0.5% (6% per year) for each month after age 65 (up to age 70) that contributors delayed receiving them. Thus, if a contributor chose to start receiving retirement benefits at age 70, the benefits were 30% more than if taken at age 65.
From 2011 to 2013, the Government will gradually increase this percentage from 0.5% per month (6% per year) to 0.7% per month (8.4% per year). This means that by 2013, if contributors start receiving their CPP pension at the age of 70, their pension amounts will be 42% greater than if taken at age 65.
The following table outlines the increase in the monthly actuarial factor for each year:
% (monthly increase)
Changes will be lower if taken before age 65
Prior to the changes, CPP retirement pensions were reduced by 0.5% (6% per year) for each month before age 65 that contributors began receiving them. Thus, if contributors started receiving their pensions at the age of 60, their pension amounts were 30% less than if taken at age 65.
From 2012 to 2016, the amount by which a contributor’s early pension will be reduced will increase from 0.5% per month (6% per year) to 0.6% per month (7.2% per year). This means that by 2016, if contributors start receiving their CPP pensions at the age of 60, their pension amounts will be 36% less than if taken at age 65.
The following table outlines the increase in the monthly actuarial factor for each year.
% (monthly increase)
Changes to the general drop-out provision
The general drop-out provision allows the contributor to exclude a portion of their zero or low earnings from the calculation of their retirement benefit. Because of work interruptions that might occur for a variety of reasons, including involuntary job losses, and because time out of the work force can lower the amount of one’s CPP pension, the pension formula is being enhanced to exclude up to eight years of low earnings under the general drop-out provision. Starting in 2012, the number of years of low or zero earnings that are automatically dropped from the calculation will increase.
Before the changes, when the government calculated average earnings over a contributor’s entire career (from age 18 until retirement), 15% of the contributor’s career period with the lowest earnings was automatically dropped. Thus, if contributors took their CPP retirement pension at 65, up to seven years of their lowest earnings were automatically dropped from the calculation of their average earnings.
Starting in 2012, the percentage of low earnings will increase to 16%, which may allow up to 7.5 years of a contributor’s lowest earnings to be dropped from the calculation. In 2014, the percentage will increase to 17%, which may allow up to eight years of a contributor’s lowest earnings to be dropped.
Elimination of the Work Cessation TestStarting in 2012, contributors can begin receiving their CPP retirement pensions without any work interruption. This will make it easier for Canadians to make a phased transition to retirement.
Introduction of the Post-Retirement BenefitStarting in 2012, if contributors are receiving CPP retirement pensions and they choose to work, they could continue to make CPP contributions that will increase their payments through the Post-Retirement Benefit (PRB). The newly-created Post-Retirement Benefit will be comprised of contributions made while contributors are receiving their CPP retirement benefits.
If they are under age 65, contributions will be mandatory for them and their employers.
If they are age 65 to 70, contributions will be voluntary (their employers will have to contribute if they do).
People between the ages of 60 and 70 who make these contributions may begin to receive the PRB the following year.
Self-employed beneficiaries will pay both employee and employer portions.
Working CPP retirement pension recipients who wish to opt out of contributing to the Plan after age 65 will be required to inform CRA.
Contributions made while beneficiaries are receiving their CPP retirement pensions will build up only the PRB. These contributions will not create eligibility or increase the amount of other CPP benefits, nor be subject to a credit split or retirement pension sharing.
Each year of work will provide an additional post-retirement benefit that will begin the following year and be paid for life.
The PRB will be added to an individual’s CPP retirement pension, even if the maximum pension amount is already being received.