While the debate on future improvements to the Canada Pension Plan (CPP) benefits continues, a number of smaller CPP changes, already agreed to by the federal and provincial governments, will be coming into effect in 2011 and over the next few years.
The most significant changes involve the flexible retirement provisions of the CPP.
You can start to draw CPP retirement benefits any time between the ages of 60 and 70. If you start earlier than age 65, your benefits are reduced by ½% per month for each month you are younger than 65. If you retire after 65 they are increased at the same rate – ½% per month. This compensates for the fact that, the earlier you retire, the longer you can expect to be collecting a benefit.
Your benefits can be reduced by up to a maximum of 30% (if you start collecting at age 60) or increased by up to a maximum of 30% (if you delay until age 70). For example, if you are eligible for maximum CPP retirement benefit in 2011, you would receive $960 a month if you start collecting at age 65, $672 per month if you start at age 60, and $1248 per month if you start collecting at age 70. After retirement, benefits are indexed to the cost of living.
To start receiving CPP retirement benefits before age 65, you also need to have stopped working, or at least have a couple of months with little or no income (the “Work Cessation Test”).
The Changes
Starting with retirements in 2011, the early and late retirement factors will change – increasing both the penalty for early retirement and the incentive for later retirement –encouraging people to keep working longer.
The increase factor for later retirement is rising to 0.57% per month in 2011, 0.64% in 2012 and 0.70% in 2013, so that the maximum increase will ultimately be 42%, at age 70. The reduction factor for early retirement will also increase, to 0.52% in 2012, 0.54% in 2013, 0.56% in 2014, 0.58% in 2015, and 0.60% in 2016, with the ultimate maximum reduction factor at age 60 of 36%.
These changes are significant, but probably not large enough to have a major impact on most people’s retirement choices. For example, if someone is eligible for the maximum CPP benefit ($960/month at age 65), postponing retirement to age 66 now raises the benefit by $65.66/month vs. the former $57.60 a month, barely $8 a month extra. By 2013, the increase for postponing retirement from age 65 to age 70 is $403.20/month compared to $288/month or an extra $115/month.
The impact of the changes is even smaller for early retirement benefits. In 2012, the monthly reduction for retiring at age 64 will be $59.90, compared to the current $57.60 – barely $2 a month difference. By 2016, the monthly reduction at age 60 will be increased to $344.60, compared to the current $288, a drop of $56 a month.
As of 2012, the Work Cessation Test will disappear. You will be able to start collecting CPP retirement benefit anytime after age 60 with no interruption in employment. Working employees, and their employers, will have to continue contributing to the CPP until age 65, even if they are drawing CPP benefits. After age 65, making continued contributions while working will be voluntary (though employers will have to contribute if employees do).
Extra benefits earned while already drawing CPP will create an extra “Post –Retirement Benefit” (PRB), which will be added to the existing CPP benefit at the beginning of the following year (even if the retirement benefit is already at the maximum level).
Finally, starting in 2012, there will be changes to the General Drop-out Provision used to calculate an individual’s CPP entitlement. Currently, at the time of retirement, CPP benefits are calculated on an individual’s career earnings record (age 18 to retirement), with the lowest-earning 15% (up to around 7 years) “dropped-out”. The drop-out generally raises the average earnings, and the level of benefit.
The general drop-out period will increase to 16% in 2012 and 17% in 2014, which will allow up to 8 low earnings years to be dropped-out of the calculation, and which should improve, at least marginally, the benefit entitlement of many, if not most, future retirees.
To date, the Quebec Pension Plan, which is run parallel to the Canada Pension Plan, has not announced similar changes to its flexible retirement and drop-out provisions.
