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.

This article has 39 comments

  1. 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. 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

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

  4. 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. 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. 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. 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.

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  9. Leading Edge Boomer

    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. Flaherty should

    1) re-instate income trusts

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

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

  13. @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.

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

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

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

  25. 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. 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.

  27. I have been collecting cpp for 9 months, but as cpp told once I have my 2 months with little or no income I can make as much as I want without penalty and still receive the cpp. My question is do I still have to pay CPP deductions when I am receiving the CPP cheque. Can I claim back the cpp deductions on my income tax for 2009?

  28. I was buying a book & was told by the man at the bookstore that he & other people he knew got CPP without dropping their income to an extremely low level. He said I had gotten wrong information when I was told you had to do so in order to get CPP at 60. I was told the same thing in the past by a young minister, who I thought was just to young to have looked into it. The man at the bookstore said that every Canadian has the right to get CPP at 60.
    How did they get it?

  29. If someone retires before age 65 at the moment there is a deduction of 0.6% per monthshy of 65 from pension payment. There is also no CPP deduction. Is there a benefit to continue CPP deductiosn to age 65 in this situation?

    apimom

  30. I am 60 and wish to start drawing my CPP and continue working.I would be off for 2 months (make less than $934 per month). But, because I don’t know when this legislation will begin, I don’t know when to do this? I can’t get an answer from CPP nor my MP. Nobody seems to be able to give me a date. Any help/info out there?

  31. Section 114(4) of the Canada Pension Plan Act requires that 2/3rds of the Provinces (excluding Quebec) with an aggregate population of 2/3rds their population are required to affect changes to the CPP Act. Since an executive order in council by the Lieutenant Governors of these Provinces can not be relied upon to represent an implied consent of 2/3rds of the population of these Provinces, given that there has not been a number that equates to 2/3rds of the population represented by the electorate in any Provincial election since the inception of the Canada Pension Plan act, my question would be, How did these two bills come into force?

    Would the distinction in CPP benefit eligibility between those retirees entering retirement before January 1, 2012, and those retiring after that date, not pose a Charter or Constitutional infraction that limits those retiring after January 1st 2012 to a lesser amount being available to them due to the mandatory requirement to pay into CPP in order to qualify for equal funding. I raise that question as a former CPP subject matter expert representing the Minister in any Court, Tribunal, or Public office in Canada.

    For example, under current legislation, a Canadian eligible for a maximum benefit who wishes to take their benefit at age 60 and continue to work through to age 65, would by virtue of doing that, have available to themselves a benefit of $834.17 (based on today’s current max) per month to spend or invest as they deem fit over the next 60 months. If they chose to invest that amount in current venues available through the Government of Canada that guaranteed them a 40% return on those investments without any risk what-so-ever, they would be able to amass approximately $70,071.12 of wealth during that period of time without pulling another red cent out of their pockets. This would afford them an opportunity to reduce mortgage debt or supplement income as they enter retirement in a manner that does not affect future generations of contributors.

    How does the equalizing funding formula attributed to the changes imposed by these two bills Bill C-51 & Bill C-36 work to counter that? With a reduction in benefit amount at age 60 (based on today’s current max) a CPP contributor would receive considerably less at age 60 estimated at 64% of the current benefit of 934.17, or $597.87 per month, and ironically, would be mandatorily required to pay CPP contributions in the amount of 180.26 or more per month henceforth to age 65, in order to gain .6% advantage per month as they move forward. I find this absurd and extortive to say the least when making comparisons to those that are eligible for CPP prior to January 1 2012. Please consider the following example:

    • By continuing to pay in, at the end of their first year, they will have gained (.6% x 12) 7.2% on the $597.87 or have reached a point whereby they would be earning $640.92 per month. Compared to the income received by previous retirees, they would be facing a net loss of ( 834.17- 640.92 = 193.25) $193.25 per month. This does not count in the extra (180.26 X 12 = 2,163.12) $2,163.12 contributions paid. When those contributions are included in the calculation, the $43.05 in monthly benefit amount gained through the first year’s additional contributions reflects a net loss of ([193.25 x 12] = 2319.00 + 2163.12 – 43.05 =4439.07) $4,439.07

    • By continuing to pay in, at the end of their second year, they will have gained 7.2% on the $640.92 or have reached a point whereby they would be earning $687.07 per month. Compared to the income received by previous retirees, they would be facing a net loss of -$147.10 (834.17- 687.06 = 147.10) per month. This does not count in the extra (180.26 X 12 = 2,163.12) $2,163.12 contributions being paid in this year. When those contributions are included in the calculation, the $46.15 in benefit amount gained through the second year’s additional contributions reflects a net loss of ([147.10 x 12] = 1765.20 + 2163.12 – 46.15 =3882.17) $3,882.17 the cumulative loss would be (3882.17+ 4439.07) = $8,321.24

    • By continuing to pay in, at the end of their third year, they will have gained 7.2% on the $687.07 or have reached a point whereby they would be earning $736.54 per month. Compared to the income received by previous retirees, they would be facing a net loss of (834.17- 736.54) = $97.64 per month. This does not count in the extra (180.26 X 12 = 2,163.12) $2,163.12 contributions being paid in this year. When those contributions are included in the calculation, the $49.47 in benefit amount gained through the third year’s additional contributions reflects a net loss of ([97.64 x 12] = 1171.68 + 2163.12 – 49.47 =3285.33) $3,285.33 the cumulative loss would be (3285.33+ 8321.24) = $11,606.57

    • By continuing to pay in, at the end of their fourth year, they will have gained 7.2% on the $736.54 or have reached a point whereby they would be earning $789.57 per month. Compared to the income received by previous retirees, they would be facing a net loss of (834.17- 789.57) = $44.60 per month. This does not count in the extra (180.26 X 12 = 2,163.12) $2,163.12 contributions being paid in this year. When those contributions are included in the calculation, the $53.03 in benefit amount gained through the fourth year’s additional contributions reflects a net loss of (44.60 x 12 = 535.20 + 2163.12 – 53.03 = 2645.29) $2,645.29 the cumulative loss would be (2645.29 + 11606.57) = $14,251.86

    • By continuing to pay in, at the end of their fifth year, they will have gained 7.2% on the $789.57 or have reached a point whereby they would be earning $846.42 per month. Compared to the income received by previous retirees, they would be facing for the first time, at age 65 a net gain (846.42 – 846.42) = 12.25 per month over former retirees benefits received at age 60. This however, still does not count in the extra (180.26 X 12 = 2,163.12) $2,163.12 contributions being paid in this year. When those contributions are included in the calculation, the $56.85 in benefit amount gained through the fifth year’s additional contributions reflects a net loss of ( 12.25x 12 = 147.00 + 56.85 – 2163.12 =1957.27) $1925.27 the cumulative loss would be (1925.27 + 14,251.86) = $16,177.13

    My firm’s would argue that post January 1, 2012 retirees would not only face an inequity with respects to not being able to use current measures to earn in excess of $70, 071.12 in the 5 years between 60 and 65, but quite too the contrary, would be facing a loss of $16,177.13 when compared to retirees that turned 60 prior to January 1st 2012.

    I will seek every opportunity to bring this matter up in a court challenge that would see these changes represent an elective choice on the part of the contributor as opposed to an imposition by Dilberts in Governance. I look forward to your reply.

    JUST FOR YOUR INFORMATION, THAT IS A DIFFERENCE OF $86,248.25 which post 2012 Canadian retirees will face, and few families facing unprecedented economic challenges can afford to give up.

    Former policty analyst for Minister of Social Development Canada

  32. Excellent article. Enjoyed reading it. Will use as much as I can out of it.

    I do have a question: can you please explain your statement:
    If they chose to invest that amount in current venues available through the Government of Canada that guaranteed them a 40% return on those investments without any risk what-so-ever.

    What current venues provide a 40% return (over what time)?

    Appreciate a feedback on this.

    E Apimom

  33. Am I the only one who thinks it’s wrong to receive CPP and have to pay in at the same time…what kind of nightmare will this spawm? Will the 3 years I’ve worked and received CPP count in the 17%,
    is this even relavent now..if they count years, will I get screwed because I will probably pay less than 50% of the CPP I used to pay? Hey, people who start working again, probably haven’t enough
    money to live on due to the recession..duh! Just what I need another deduction, and for what, an extra
    $1.00 a month? How long will I have to live to recoup my loss? I only planned to work 9 more months from Jan 2012. The CPP deducted would be about $450.00.
    Hey, we all could look at a calendar and know when the Baby Boomer would turn 65 and the rest of us agreed to the reduced CPP so why is the Government so surprised that they are in trouble.

  34. I am self employed and applied for CPP when I was 60. I will be 65 in October 2012. Question – do I have to pay premiums for 9 months or am I OK because I turn 65 in 2012.

    As a self employed person I would have double premiums – my contribution as well as the employers contribution….would not be happy about this.

    Look forward to your response.

    Jean

  35. Here”s an interesting one ,i was 30 yrs. old when my husband passed away he was 37 & he worked & payed into ccp but i was not able to cllect it after he died because i was not old enough & we had no kids ,they said when i turns 65 i can apply for his ccp,now isn”t that nice of the gov.

  36. Who do these cl;owns think they are? Do they think we are stupid while their legally stealing our money and giving nus so much crap they beleive it themselves. There should be a general strike for a month and see how much taxes they collect to fill their f|n pockets.It,s like the casino|s ripping you off. Did they ever here of prohibition? Legal way for them to feed us crap. The politicians should be loxcked up for the BS theyn feed us. If we did what they did we would be in jail and throw away the key. THEY MAKE ME SICK. Nobody has the balls to stop working for a week or 2. Instead of helping low income people on CPP or other low wages while the politicians dictate to us. WE the people are tyhe government but nobody remembers that. Soon we will all live under the bridges & on the streets. The increase in the cost of living & everyyhing else we need necessities car insurance ETC. is so out of line we should park our cars in the sreets and stay home wecannot afford high car premiums when the cost is way more than the value of the vehicle.Anyway i could go on forever but everybody will take it and say tax m,e more until you lose everything and dignity.

  37. malcolm mac donald

    wonderful change. everyone will go along with it if MP pensions are cut to.

  38. Can anyone tell me what happens to a widows survivor pension if she decides to remarry .. does she cease to receive the benefit or is the amount decreased? Would there be an adjustment dependent on the income of her future spouse..

  39. The proper target for this would be: http://www.servicecanada.gc.ca/eng/services/pensions/cpp/survivor-pension.shtml

    All other comments might or might not be correct

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