On December 15, 2009, several changes to the Canadian Pension Plan (CPP) became law with the passing of Bill C-51. Changes include:
These new changes will be gradually phased in over five years starting in 2011. However, the changes will have no impact on you if you are already receiving a CPP retirement pension, disability benefit, survivor benefit, or if you will begin to receive these benefits in 2010.
Details of these changes are discussed below.
PENSION ADJUSTMENTS FOR EARLY AND LATE CPP TAKE-UP
Current Rules – If CPP is taken early, your pension benefit is reduced by 6% per year or 0.5% per month for each month that the pension is taken before your 65th birthday to a maximum of 30%. For example, if you take your pension as early as age 60, the pension benefit would be reduced by 30% (5 years x 12 months x 0.5%).
If CPP is not taken until after age 65, your pension benefit is increased by 6% per year or 0.5% per month up to the age of 70 to a maximum of 30%. If you wait until age 70 you will receive a 30% increase of your basic CPP benefit.
New Rules – For early CPP take-up, there will be a reduction in benefits by 7.2% per year or 0.6% per month for each month that the pension is taken before age 65 to a maximum reduction of 36%. This increase will be implemented gradually over a 5 year period beginning in 2012.
For late CPP take-up, there will be an increase in benefits by 8.4% per year or 0.7% per month for each month that the pension is taken after age 65 and up to the age of 70 to a maximum increase of 42%. This increase will be implemented gradually over a three year period beginning in 2011.
REMOVAL OF WORK CESSATION TEST FOR EARLY CPP TAKE-UP
Current Rules - In order to apply for benefits from age 60 to 64 you must either stop working by the end of the month before your CPP retirement pension begins and during the month in which it begins, or your earnings must be less than the current monthly maximum CPP.
New Rules – Starting in 2012 the requirement to stop working or significantly reduce your earnings to take-up early CPP will no longer apply. These New Rules allow you to take-up your CPP pension while continuing to work. For example, with a CPP pension, you may be able to reduce your work hours and still maintain roughly the same income from the combined CPP and reduced employment earnings.
MANDATORY CONTRIBUTIONS TO CPP FOR CPP PENSIONERS UNDER AGE 65
Current Rules - Currently, if you are retired and receive CPP pension benefits and decide to go back to work, you are not required to restart contributions to CPP on your salary or wages. With the Current Rules, once you start receiving your CPP pension, you can work as much as you want but you are not required nor will you benefit from any further contributions made to CPP.
New Rules - If you are under age 65 and are receiving your CPP monthly pension and continue to work, you and your employer are required to continue to contribute to CPP. If you are between the ages of 65 to 70 collecting a CPP pension and continue to work, the decision to continue to contribute to the CPP is voluntary so you may elect not to make CPP contributions. However, if you opt to participate in the CPP your employer will be required to also contribute. These contributions will result in increased retirement benefits.
Although these new changes require that you continue to contribute to CPP, if you take an early CPP and continue to work, they also enable you to increase the amount of the CPP benefits you will receive. The additional contributions after CPP take-up are intended to increase your retirement benefits at a rate of 2.5% of the maximum pension amount per year of additional contributions.
Depending on your earnings level, these changes have the potential to increase your CPP pension above the maximum monthly benefit limits.
INCREASE IN GENERAL LOW EARNINGS DROP OUT
The amount of your monthly CPP pension benefit depends on how many years you contributed to the plan, the amount of your contributions, and the age at which you decide to start receiving your pension. Your benefit is calculated as 25 percent of your "average career earnings", starting at age 18 and ending at the age of CPP take-up. However, there is a general adjustment in the calculation that allows for a "drop out" of certain periods of low or no income. In addition, there are certain drop-out provisions such as for child rearing and for periods spent receiving a CPP disability benefit. When these periods are excluded there is the potential to increase your monthly CPP benefit up to the maximum amount.
Current Rules – Before 2012 the general drop-out provision is 15% of the years where your earnings are low or nil.
New Rules – The general drop-out provision will increase to 16% in 2012 and 17% in 2014. This will allow a maximum of almost 7.5 years of low or zero earnings to be dropped in the CPP benefit calculation for years 2012 to 2013 and 8 years of low or zero earnings to be dropped starting in 2014. These changes can increase your CPP pension benefit if you have multiple years of low or no income years, which may have resulted from pursuing educational opportunities, caring for family members, or due to entering the Canadian workforce later in life because you immigrated to Canada as an adult. Since the average CPP disability and survivor pensions are based on the retirement benefit calculation, the New Rules can increase the average CPP disability and survivor pensions as well.
For more details please see the Services Canada site.