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Major Changes Coming to the Canada Pension Plan

May 26th, 2009 · 26 Comments

The Ottawa Citizen reported today that following a meeting between Jim Flaherty and provincial Finance Ministers, major changes to the Canada Pension Plan (CPP) are coming and will be phased in gradually starting in 2011. Among the changes:

  1. The current requirement that Canadians must stop working or significantly reduce their earnings to receive their CPP retirement benefit will be removed.
  2. The drop out provisions, which allow for a certain number of years with low or nil earnings to be excluded will be increased from the current 15% to 17%. This would allow a maximum of eight years to be dropped (up from seven) and should benefit early retirees.
  3. Those opting for early CPP benefits and are still working are required to contribute to the CPP at the same time. Contributions are optional for individuals who are 65 and over.
  4. Those who take CPP benefits before age 65 will have their pension reduced by 0.6% (from the current 0.5%) per month for each month that the pension is taken before age 65. Similarly, those who delay taking their CPP benefits will see it increased by 0.7% per month (from the current 0.5%). In other words, CPP benefits are reduced for a person who begins drawing at 60 by 36% (up from 30%) and increased for a person who waits until age 70 to 42% (again up from 30%).

Despite the above changes, the contribution rates to the CPP will remain at 9.9%. But more changes to the pension system may be coming. The Citizen reported:

Also Monday, Flaherty announced a panel of federal and provincial policy-makers would look into further changes to the country’s pension laws and report to Parliament with recommendations by year-end.

I don’t have an online link to the Citizen column but you can read about it all straight from the horse’s mouth: Department of Finance information paper on proposed changes to the CPP is available here.

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26 responses so far ↓

  • 1 Four Pillars // May 26, 2009 at 8:48 am

    Interesting – I didn’t know that the CPP benefit was income dependent up to now. What if you have a pension or investment earnings? Is there a clawback of some sort?

  • 2 Four Pillars // May 26, 2009 at 8:55 am

    Ok, just read the document. The “clawback” or “Work Cessation Test ” only applied to someone taking early benefits (under 65 years of age).

    Another interesting change is the increase in “drop out years” from 6 to 8 years. This the number of low income years that they will remove from their benefit equation. This change will benefit people who take early retirement.

  • 3 Canadian Capitalist // May 26, 2009 at 9:05 am

    Mike: Good point. I did mean to add the point about the increase in drop out years. I’ve added it now.

  • 4 Rob // May 26, 2009 at 9:49 am

    I believe that the drop out provision only applies to those years when contributions were low due to being away from work to raise your young children.

    I don’t think it applies to anyone else.

    Anyone else know of other times where it may apply?

  • 5 Four Pillars // May 26, 2009 at 10:29 am

    Rob, there is a drop-out provisions for child-rearing years in addition to the one that I mentioned which applies to everyone. The document CC linked to has some info on it.

  • 6 Rob // May 26, 2009 at 10:47 am

    Thanks Four Pillars

    Well, I guess you learn something new every day – I hadn’t realized that a drop out provision factored in for everyone.

    For anyone else enlightened by this, here is the specific text from the government document…

    ” B). Increase in the General Low Earnings Drop-Out

    The CPP retirement pension amount is based on the number of years a person has worked and contributed to the Plan, as well as the salary or wages he or she earned. Specifically, it is calculated as 25 percent of an individual’s “average career earnings”, starting at age 18 and ending at the age of CPP take-up. If, for example, an individual takes the CPP at age 65, the span of the career is considered to be 47 years. If, for example, the CPP is taken at age 60, the span of the career is 42 years.

    The average of earnings over the span of the career is calculated allowing for 15 percent of the years where earnings are low or nil for whatever reason (e.g., full-time post-secondary education attendance or spells of unemployment) to be dropped. This provision is called the “general low earnings drop-out”. The 15 percent gives individuals who take their CPP at age 65 almost 7 years of low or zero earnings years that can be dropped from the calculation of their average career earnings. In addition, there are drop-out provisions specifically for child rearing and periods spent receiving a CPP disability benefit.

    These drop-out provisions are intended to ensure that an individual’s average career earnings are not affected by a certain number of years of unusually low earnings that occur in most people’s career for various reasons. Virtually everyone benefits from the CPP’s drop-out provisions. Without these provisions, virtually everyone’s “basic” pension amounts – that is, the pension amount if the CPP is taken-up at age 65 without any adjustments for early or late take-up – would be lower.

    ——————————————————————————–

    Proposed Change

    To increase the general drop-out:
    To 16 percent in 2012. This would allow a maximum of almost 7.5 years to be dropped.
    To 17 percent in 2014. This would allow a maximum of 8 years to be dropped.
    This change would not affect existing CPP beneficiaries or those who take their benefit before the change comes into effect. “

  • 7 MoneyEnergy // May 26, 2009 at 11:46 am

    Thanks for the update; it especially pertains to my parents right now, so I can tell them about it. The changes seem reasonable to me, from what I understand about it, except the one about drawing on your CPP at the same time as you contribute to it. That seems a little counterproductive.

  • 8 Early retirement claims up in U.S.; Ottawa discourages taking CPP early | Nevada Retirement Planners // May 26, 2009 at 11:56 am

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  • 9 Leading Edge Boomer // May 26, 2009 at 12:47 pm

    The increase in drop out years will benefit some early retirees , not all.

    But note that the reduction in the pay out for taking your CPP at age 60 rather than 65 will increase from 30% to 36%. This will be detrimental to all early retirees.

    You can also be working, and not retired, when you start collecting CPP.

    All -in -all ,the sum total of the new provisions seem to be a mild discouragement to taking an early retirement.

  • 10 Phasor // May 26, 2009 at 7:38 pm

    Flaherty should

    1) re-instate income trusts

    2) remove the RRSP contribution limit for those individuals who are members of a pension plan

  • 11 TStrump // May 26, 2009 at 10:49 pm

    My mom actually was going to apply for the drop out provision as she was a housewife for many years, but in the end she decided not to.
    It doesn’t seem fair that woman get penalized for deciding to raise kids – she did it for over 20 years.
    Unfortunately, she never got a full pension – it’s like $30/month for the years she worked.

  • 12 Traciatim // May 27, 2009 at 8:32 am

    TStrump, what is the rationale for not taking benefits to which you are entitled?

  • 13 TStrump // May 27, 2009 at 12:34 pm

    @Traciatim With her work situation or lack thereof, it wasn’t worth it – she was out of the workforce for over 20 years. By the time she was ready to come back, she was unable to find decent employment (long story).
    While the dropout provision would have exempted some of the time, she was still out for too long.

  • 14 Canadian Dream: Free at 45 » Blog Archives » The New CPP: Can You Still Retire Early? // May 28, 2009 at 8:59 am

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  • 19 Edward Lee // May 29, 2009 at 10:37 pm

    well Now that I had to quit working to take cpp at 60 things will change..
    Too bad for me

  • 20 Eli // Jun 8, 2009 at 7:49 am

    What if I have been away from the country for 12 years.
    How does it count with the maximum of 8 drop-out years ?

  • 21 Kathy // Jun 16, 2009 at 11:27 pm

    Could you tell me if I semi retire at 55 and get a part-time job can you stop paying into cpp. I have been paying the max cpp for a long time and getting a part-time job would that lower my monthly payment

  • 22 Edward Lee // Jun 17, 2009 at 12:22 am

    I believe that the monthly payment would not be affected. If I am wong I apologize

  • 23 John Newton // Aug 27, 2009 at 8:04 pm

    If an ex-spouse dies, the government steals her CPP. It does not go to the person who paid it for his entire life. Man do I ever hate the Canadian government.

  • 24 Anjo // Jan 15, 2010 at 3:29 pm

    Does anyone know if these changes were passed through legislation or has this been lost as part of the prorogation of parliament?

  • 25 Anjo // Jan 15, 2010 at 3:41 pm

    As a response to myself and if anyone else is interested, the legislation that included these changes (Bill C-51) was passed and received royal assent in Dec 2009.

  • 26 JoJo // Feb 2, 2010 at 2:49 pm

    I’m confused …. Why would my CPP contributions be averaged over years when I wasn’t even a resident of Canada. I didn’t live here, I didn’t work here and I wasn’t
    in any way shape or form present here. I probably didn’t even think about being
    here at that point.

    When I had worked here for many years, then I dropped out off work to raise 2 children 6 years apart …. how would 15% or 6-8 years even begin to compensate me for the time out and time each child needed that I took from working and my career and not earning any income.

    Somehow I don’t think our CPP system is very fair. Some countries would have
    paid me to stay home and look after my kids, but being young and starryed eye and in love with young Canada I wasn’t thinking about pension plans back then …. of course, I am aware that there is no way that one could survive on $948 (if anyone actually gets that which I now doubt as I research the average CPP payments made is not even close to that in payouts by CPP dept. as I dont think too many Canadians actually contributed for 47 years( + $500 Old Age security if you quailify for that) per MONTH income in old age …. I’d like to see those bureacrats try to live on that themselves. THIS IS A JOKE. I now feel sorry for all those past pensioners … no wonder most of them looked half starved, sad and shabby. Just out of curiosity I also surveyed the pension amounts pensioners get in related other western countries and WHAT a COINCIDENCE … they all averaged approx. the same amount (price fixing for pensioners benefits I’d say)

    As I’m getting closer to retirement age … I am NOW paying attention to all this
    crap that’s been going on …. hurray for boomers … boomers unite … grey power.

    Theoretically, if and when we all obediently and with trust and naivety contributed our contributions to CPP, had the CPP dept. in their wisdom invested our contributions wisely and we earned accumulative daily interest …. I am sure our old age pensioners would not be out on the streets scraping through garbage cans to make ends meet. HOW SAD that some many people will now suffer the consequences ….I think some bureacratics from that era … should be held liable …. banish the though eh … as they bask in the sun in their well afforded pension lairs
    and riches.

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