New proposed changes for CPP

On May 25, 2009, Federal, provincial and territorial Ministers of Finance recommended changes to the Canada Pension Plan (CPP).

The proposed changes are intended to modernize the plan to better reflect the many different paths people take to retirement today. The proposed changes will provide greater flexibility for older workers to combine pension and work income if they wish; modestly expand pension coverage; and improve fairness in the Plan's flexible retirement provisions. The proposed package is affordable within the current CPP contribution rate of 9.9% on earnings up to average wages and could improve the long-term sustainability of the Plan.

Canadians need to be aware of these changes because it affects everyone in the work world especially those planning to retire around 2011.

1. Elimination of the stop working rule. Currently In order to collect CPP, you must be at least 60 years of age and have stopped working or reduce your earnings for 2 months. The proposal is to remove the requirement to stop working and allow any Canadian to elect CPP as early as age 60. I like this change because the current rules were confusing and open to abuse. Many people were playing games and able to collect CPP early anyways. It just makes sense to eliminate the rule.

2. Increase the reduction of early CPP. Currently, those that take CPP early can do so but at a reduced rate of 0.5% for every month prior to your 65th birthday. For example at the age of 60, the reduction would be 30%, which is 0.5% x 60 months. Under the proposed changes, the reduction would increase to 0.6% for every month prior to your 65th birthday, which would result in a 36% reduction. Obviously, this change is meant to deter people from taking CPP early, which under the current rules make a lot of sense to do so. Even with the new reduction rate of 0.6%, the breakeven calculation suggests that taking CPP early probably still makes the most sense most of the time. The breakeven point moves from age 77 to age 74. For more information on this refer to a previous article I wrote.

3. Increase the enhancement for collecting CPP after age 65. In order to try and entice people to delay taking CPP early, not only are they proposing to apply a bigger reduction to taking it early, the proposal calls for an enhancement of the benefit for those planning to delay CPP. The enhancement would be 0.7% for every month after your 65th birthday. In other words if you waited till 70 to collect CPP, you would get a 42% increase (0.7% x 60 months). I don't know if I would go for this deal. You have to live a pretty long time to make up all the CPP you left on the table for the last 10 years. I'm not sure I would wait around for this enhancement so this change does not entice me at all.

4. Contributions to CPP while working. Currently, those who collect CPP and then return to work do not have to pay into CPP. Once you collect a CPP benefit you never have to contribute into the CPP plan again. With the new proposed changes, not only will you be able to collect CPP while you are working but you will have to continue to make contributions into CPP as long as you are working under the age of 65. These contributions will result in increased retirement benefits, including persons already receiving the maximum pension amounts. After the age of 65 contributions into CPP will be optional. Although I would prefer to see the current system remain unchanged where contributions stop once you collect CPP, I do understand why this change makes sense.

5. Increase the low earning drop out. This change probably has the greatest universal affect on Canadians but the degree of change itself seems pretty insignificant. Currently, Canadians who retire at 65 can drop out 7 of their low earning years out of the total 47 years (from age 18 to 65) you were eligible to contribute to CPP. This drop out allows Canadians to remove years where they went to school or took time off or were unemployed. Under the new rules, the proposal is to increase the drop out period. But before you get too excited, the plan is to increase the drop-out to 7.5 years in 2012 and 8 years in 2014. According to the information paper circulated by the government, "This change would benefit virtually all CPP contributors and improve their basic retirement pensions." While this is true, I'm not too excited about counting my pennies.

My two cents.

Overall, I think changes to CPP are in order. The current rules need to be 'modernized'. My favorite change is the elimination of the 'stop working for two months' rule because it was a confusing rule and was not enforced properly anyway.

In my professional work, I felt it was in most people's interest not to defer a pension. For most people, taking CPP early has more advantages than delaying it. Under the new rules, I'm not sure the outcome of may analysis changes much even though you will get less at 60.

I think people who are turning 60 in the next couple of years before the implementation of these new rules will have to look really hard at whether it is to their advantage to take CPP before the new rules and get grandfathered under the old rules or wait and take CPP under the new proposed rules.

What do you think abou these proposed changes? I'd love to hear from you at feedback@wealthwebgurus.com.