The government has proposed changes to the administration of the Canada Pension Plan.
Before these proposed changes become law, they must be approved by Parliament, as well as at least two-thirds of the provinces with two-thirds of the population of Canada (excluding Quebec).
The proposed amendments, which might discourage new retirees from taking their CPP before they turn 65, begin in 2012 and will be gradually phased in.
Between the ages of 60 and 70, pensioners can apply to begin receiving monthly pension benefits under the CPP.
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The amount of money a pensioner collects from CPP depends on how many years he or she has contributed to the plan, the amount of the contributions and the age at which the pensioner starts receiving the pension.
CPP benefits are adjusted annually for inflation; the maximum monthly retirement benefit at age 65 is now about $909.
These benefits are taxable as income.
Early or late take up
People normally start taking CPP at age 65.
However, taxpayers can start collecting at age 60, with a 0.5 percent reduction for each month before the taxpayer turns 65. In other words, a 60-year-old would have the 30 percent maximum reduction, (60 months times 0.5 percent).
Under new proposed rules, taxpayers who choose early take up of their CPP benefits at age 60, would see the penalty rise to 0.6 percent per month for a 36 percent maximum reduction.
This increase would be implemented over five years, starting in 2012.
There are also adjustments for late CPP take-up up to age 70.
For those who choose to continue to work after 65, the benefit rate would increase to 0.7 percent per month from the current 0.5 percent.
This increase would be implemented over three years, starting in 2011.
Working beneficiaries
Currently, taxpayers who receive a CPP pension and return to work (the government calls them working beneficiaries) do not pay CPP contributions and, therefore, do not continue to build their CPP pension.
Under the proposed rules, taxpayers younger than 65 who work and receive a CPP retirement benefit must still make CPP contributions, which are matched by their employers.
Taxpayers over age 65 can also opt in and participate in the CPP to continue to build their pension, which would require their employers to contribute as well.
These contributions are intended to increase retirement benefits.
Low earnings drop-out
Currently, the CPP payment is based on the number of years a taxpayer has worked and contributed to the CPP, as well as earnings.
Specifically, it is calculated as 25 percent of a taxpayer’s average career earnings, starting at age 18 and ending at the age of CPP take-up.
However, there is a “general low earnings drop-out” provision that allows a taxpayer to drop 15 percent of the years where earnings were low or nil for whatever reason. For those who have worked 40 years, 15 percent is about seven years.
The government proposes to increase the general low earnings drop-out to 16 percent in 2012 and 17 percent in 2014.
Work Cessation Test
Currently, pensioners who choose to take the CPP before age 65 must either stop work or reduce their earnings for at least two months. This is called the Work Cessation Test.
Under the proposed rules, as of 2012, pensioners would be able to take their benefit as early as age 60 without a work interruption or reduction in hours worked or earnings.
You should consult your professional advisor if you would like to discuss how these proposed changes will affect you and your retirement planning.
Colin Miller is a chartered accountant and senior manager in KPMG’s tax practice in Lethbridge. His opinions do not necessarily reflect the views of The Western Producer. He can be reached at 403-380–5707 or by e-mail at colin.miller@kpmg.ca He would like to thank Jenny Koba of KPMG for her assistance with writing this article.
