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Winnipeg Free Press - PRINT EDITION

Making sense of the new (and complicated) changes to CPP

By: David Christianson

Posted: 02/10/2012 1:00 AM | Comments: 0 (including replies)

A number of changes were made to Canada Pension Plan rules effective January 2012. Some changes are significant and have caused us to change our advice on taking CPP early. Additional evolutionary changes will continue for the next few years.

Unlike OAS, which is funded from general government revenues, CPP is self-funding, through premiums and investment earnings on its fund of more than $150 billion. Workers pay into the plan at a rate of 4.95 per cent of their employment earnings up to $50,100, the 2012 YMPE (yearly maximum pensionable earnings) amount.

Employers match that contribution. The maximum 2012 employee premium is $2,307, and combined employee/employer premium is $4,614, or 9.9 per cent of eligible income. The self-employed pay both halves.

The maximum benefit at age 65 is $987 a month, assuming a person has paid in the maximum premium in 85 per cent of their eligible years -- age 18 to age 65. The average benefit for a 65-year old in 2011 was $512.64, according to the Service Canada website.

"Normal" CPP retirement age is 65, but you can choose to take smaller benefits as early as 60 or opt to take higher benefits later.

A positive change in 2012 is more flexibility on taking benefits early. Previously, an employee had to stop work for at least two months or certify they had substantially ceased employment. Now, an employee can start CPP benefits any time after age 60, even while working.

However, if you continue working, you and your employer must both continue paying into the plan, even while you are receiving benefits. That change is huge, as avoiding premiums was one of the advantages of taking benefits early. Now, there is much less incentive for people who are still employed or self-employed to take early benefits.

Premiums aside, there is a reduction to your benefits if you take them early and an increase to benefits if you take them later. The base benefit set at commencement remains for life, though benefits are increased each year by the cost of living.

Here are the new changes. The decrease was previously 0.5 per cent for every month you started benefits prior to age 65, for a maximum reduction of six per cent for each early year. The reduction, therefore, for a person exactly age 60 was 30 per cent -- five years times six per cent a year. If delaying application until after 65, benefits increased by the same rate.

For 2012, the adjustment rate will now be 0.52 per cent, or 6.24 per cent annually. From 2013 to 2016 it will move up in small steps to eventually become 0.6 per cent (7.2 per cent a year), or a 36 per cent maximum reduction for a person starting benefits at age 60.

The good news is the reward for waiting is more generous than in the past. Waiting from 65 to 66 will increase benefits by 8.4 per cent, and a person waiting to age 70 can have their benefits increased by 42 per cent, once these changes are fully implemented in 2016.

There is also a new concept called the Post-Retirement Benefit (PRB). People who are working and receiving benefits will now still pay into the CPP in order to increase their future benefits, though they can they choose to opt out of this after age 65.

Contributions to CPP made while you are under age 65 and working while receiving CPP benefits, or voluntary contributions made after 65 while still working and receiving CPP benefits, all go toward the PRB, increasing future benefits.

A person who is employed or self-employed at 65 can opt out of paying premiums (by filing form CPT30), but only if receiving CPP (or QPP) benefits at that time.

It's all a bit complicated... forgive me (and correct me) if I get any of this wrong.

To get more information on CPP, EI or any other benefit programs, you can call Service Canada at 1-800-277-9914 or go to www.servicecanada.gc.ca

They have income calculators, as well. Let me know if you can make them work.

David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a portfolio manager (restricted).

dchristianson@wellwest.ca

Republished from the Winnipeg Free Press print edition February 10, 2012 B10

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