In 2012, big changes were made to the Canada Pension Plan rules, with some additional evolutionary updates happening this year. It's time to review the rules to make sure your CPP plans and decisions are still optimal for you.
The maximum benefit available in 2013 to a 65-year-old is $1,012 per month. To receive the maximum, a person must have paid the maximum premium in 85 per cent of their eligible years from age 18 to age 65.
Looked at a different way, a person can pay in less than the maximum in up to eight years before suffering a reduction from the maximum available. Less than the maximum contribution is made if a person earns less than $51,100, the Yearly Maximum Pensionable Earnings amount.
Here's the effect of this: The average benefit for a 65-year old in 2013 is $535 per month, according to the Service Canada website.
The "fairness" is that people with lower incomes pay less into the plan. In 2013, workers pay at a rate of 4.95 per cent of their employment earnings up to that YMPE limit of $51,100, a maximum premium of $2,356. No payments are allowed above that.
Employers must match the employees' contribution. Self-employed people pay both halves, which is 9.9 per cent of eligible income.
"Normal" CPP retirement age is 65, but you can choose to take a reduced benefit as early as age 60 or opt to take a larger benefit after 65.
Waiting after 65 will increase benefits by 0.7 per cent per month, or 8.4 per cent per full year. A person waiting to age 70 can theoretically have their benefits increased by 42 per cent once the changes are fully implemented in 2016.
However, the increase may be slightly smaller if the person has not contributed at the maximum for virtually every year from age 18 to 65. In that situation, the person is moving slowly further away from the theoretical maximum.
Taking a benefit before 65 results in a reduction of 0.54 per cent for each month prior to 65, or 6.48 per cent for each full year you are younger than 65. (The reduction increases to 0.56 per cent in 2014 and to 0.6 per cent by 2016.) The reduction is permanent.
How do you decide?
I hesitate to generalize, because everyone's situation is different. The most important factor -- and the biggest unknown -- is your life expectancy. A simple break-even calculation suggests that if you start CPP at 60, you are ahead until 76, and then after that you would have been further ahead by waiting.
But this ignores your tax rate, how much you might earn on the extra income in the early years, or which other sources of income you might otherwise defer by taking CPP.
If retired and no longer contributing to CPP, then early commencement will often make sense. The "risk" is that you live long, which is its own reward. As well, most people tend to spend more in the early years of retirement, and less later. Taking CPP early helps support that.
Service Canada has a good income calculator online, which can give you the accurate figures for CPP and OAS at different ages and also project income from our RRSPs -- www.servicecanada.gc.ca and click "Calculate my retirement income."
A positive change made in 2012 was more flexibility in taking benefits early. However, now if you continue working, you and your employer must both continue paying into the plan, even while you are receiving benefits. That's a big change, as avoiding premiums was previously one of the big advantages of taking benefits early.
To get more information on CPP/OAS you can call Service Canada at 1-800-277-9914 or surf their website.
(Do people still say "surf"?)
David Christianson, BA, CFP, R.F.P., TEP, is a financial planner, adviser and vice-president with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance