A few years ago, the federal government proposed changes to the Canada Pension Plan. The changes were in response to our aging population and the dramatic shift of population – the baby boomers – into retirement. These factors combined with declining fertility rates and increased claims for disability pensions meant changes had to be made to maintain the sustainability of the program and ensure it is a viable pension plan for future generations. If you remember there was changes made in regards to the management of the CPP earlier this decade with an increase to employee and employer contributions to the plan and more latitude to the CPP Board on the management of the assets – ability to take on more global exposure, etc. These recent changes to CPP will not be the last as future governments will be tasked to maintaining these programs.
The Canada Pension Plan was created by legislation in 1965 as a national social insurance system providing retirement, disability and survivor benefits. The CPP and QPP went into effect in 1966, are closely coordinated and contributions to the CPP/QPP are portable from one province to the other.
The majority of the most recent changes came into effect January 1, 2012. These new rules are impacting Canadians between the ages of 60 and 70 who have either started collecting CPP benefits or will have to soon decide when to start collecting benefits. Prior to January 1st, if you were between the ages of 60 and 70 and had started receiving your CPP benefits you were no longer required to pay CPP premiums (neither was your employer). In order to have started receiving benefits you would have had to stop working either the month before or the month that you CPP benefits would have started. If you began to collect your benefits early (between age 60 and 65), the amount of CPP benefits would have been reduced up to a maximum of 30%. If you delayed collecting benefits after your 65th birthday (up to age 70), your benefits would have increased by a maximum of 30%.
What are the New Rules?
1. Work Cessation Test and Requirement to Remit Premiums
· If you are 60 years of age or older you will no longer be required to stop work for a 2 month period in order to receive CPP benefits. If you are under age 65, you will be subject to CPP premiums on your employment and self employment income even if you are already collecting benefits. If you are between the ages of 65 and 70, you’ll be subject to CPP on your employment and self-employment income by default, but if you are already collecting CPP benefits you’ll be able to opt out of the requirement to pay premiums. If you continue contributing to CPP while already collecting benefits you’ll receive a post-retirement benefit which will be effective the calendar year following the premium payment, so that your CPP benefits will increase each year you continue your CPP contributions
2. Increase or Decrease in Benefits
· If you commence to receive CPP benefits before age 65, the reduction in your benefit entitlement will gradually increase from 0.5% to 0.6% per month by 2016, so that the maximum reduction in benefits will be 36% if you start to collect benefits at age 60. Likewise, if you delay initial receipt of your benefits to past age 65, your benefit entitlement will gradually increase from 0.5% to 0.7% per month over a three-year period (from 2011 to 2013). Therefore, the maximum increase in your benefits will be 42% if you wait until age 70 instead of age 65 before beginning to collect benefits.
These changes mean determining when to begin CPP benefits has become a more complex planning issue than in the past. If you are working past 64 and receiving CPP benefits you need to decide whether you will continue to pay your CPP premiums. These changes make it more important today to work closely with your advisor in the development and monitoring of your Retirement Income Strategy.
What about OAS?
A few weeks ago Prime Minister Harper delivered a speech at an economic summit in Geneva, where he mentioned that Canada’s other pension program, Old Age Security, was under review and considerations were made to increase the eligibility age from the current age 65. In the following weeks the finance minister, Jim Flaherty, has come out to say that any changes would not come on line until at least 2020. These comments by the government are again in response to the increasing sustainability pressures on our public pension system. This is a debate that needs to be had and will be a similar debate that will be happening in other developed nations. When looking specifically at Old Age Security we have to look at the history of the program and the many changes that have been made to in fact increase the amount that has been paid out under the program.
The Old Age Security Act came into force in 1952, replacing legislation from 1927 requiring the federal government to share the cost of provincially-run, means-tested old age benefits. The Act has been amended many times. Among the most important changes have been: the drop in age of eligibility from 70 to 65 (1965), the establishment of the Guaranteed Income Supplement (1967), the introduction of full annual cost-of-living indexation (1972), the establishment of the Spouse’s Allowance (1975), payment of partial pensions based on years of residence in Canada (1977), maximum of 1 year retroactive benefits (1995), etc. As you can see all these changes have increased the cost of the program and with the current shift in demographics the sustainability of the program is in question.
I think we would all agree that changes have to be made to these programs so they will be around for future generations and no doubt the debate will be a lively one. It is a debate that we need to have and in the end will be a worthwhile one. I encourage everyone to get involved and voice their opinion through their elected officials and directly participate in the public consultation process.
Sources: Grant Thornton LLP November 2011 Newsletter
