Lifestyle
Pension Plan changes go into effect in 2012 HORIZONS
BY STEVE MALETTE
Summer 2010 |
The life expectancy of a male living in Canada in 1966 was 68. For a woman, life expectancy was 75. In 2011, this has increased to 78 and 82 respectively. Not only do we live longer, we tend to retire earlier as well. The median retirement age in Canada was 65 in 1971 and in 2009 it was 62. Canada's retired population has also grown since 1971. Consider that in 1971, less than four percent of Canada’s population was 65 or older: today that has grown to 14 percent. What does all this mean? It means changes to the CPP are needed to ensure its continued ability to fulfil its mandate. The CPP offers more than just retirement benefits to contributors and their families. It offers disability benefits and death benefits as well. These benefits have a great deal of value. I find it interesting that the Service Canada website refers to the CPP as, “an earnings related social insurance program that provides basic benefits when a contributor to the plan retires or becomes disabled. When contributors die, the plan provides benefits to their survivors.” The CPP as insurance? Just ask anyone who has lost a spouse and you will be surprised by the benefits paid to them and their children. A surviving spouse may receive a monthly benefit of as much as $529 and the children of a deceased contributor could receive a monthly benefit of as much as $218. I include this in my discussion to emphasize the whole of benefits offered by the CPP; which go beyond retirement. As the government puts it, “The Canada Pension Plan is changing to better reflect how Canadians choose to live, work, and retire. These changes will ensure the CPP remains fair and sustainable, and that it responds to the evolving needs of Canada's aging population and to changes in the economy and labour market...Canadians will have more options to make the decisions that are right for them as they make the transition from work to retirement.” First, the disincentive to take the CPP early is increasing. Currently your benefit is reduced by 0.5 percent for each month before age 65 that you began receiving benefits. Between 2012 and 2016 this disincentive will increase to 0.6 percent. Currently if you take CPP at your earliest opportunity (age 60), you would see a reduction of 30 percent: by 2016 this will be 36 percent which is not an insignificant change. The incentive to wait to begin retirement benefits is also increasing. In 2010 you were rewarded for waiting to take benefits by the same factor you were penalized for taking early benefits. This has changed. Between 2011 and 2013 this incentive factor will increase to 0.7 percent. So, this means that, by 2013, if you start receiving your pension at the age of 70, your pension amount will be 42 percent more than it would have been if you had taken it at 65. One of the most common questions I am asked is whether it is better to take benefits early and receive a smaller amount for a longer period of time (assuming a specific life expectancy) or to wait and receive a larger benefit for a lesser period. Using a simple Time Value of Money calculation (assuming no rate of return on the amount received), under the current rules, my answer most often is to take benefits early. Under current rules you would have to live to be 79 before you would have accumulated more income by waiting to age 65. Many people live past 79, but it is certainly not guaranteed. Add a small rate of return to the above calculation and the “break-even point” gets pushed back to your mid to late 80s. Under the new rules my answer will be quite different. I will most likely recommend that, all things being considered, one should put off receiving benefits until 65. It is clear to me that the goal of this change is to have contributors wait longer before starting their retirement benefits. It is also clear to me that it will work. Next, at present if you are under the age of 65 and in receipt of the CPP retirement benefit, you do not make contribution to the CPP. This is changing. Starting in 2012, if you are under 65 and you work while receiving your CPP retirement benefits, you will have to make mandatory CPP contributions. Your employer will also have to make mandatory CPP contributions on your behalf. These contributions go toward a new Post-Retirement Benefit (PRB), which will increase retirement benefits effective Jan. 1 of the year following your PRB contribution. Many Canadians elect to work well into their senior years. Now these seniors will continue to contribute to the CPP pool. After age 65, you will have the option of making addition contributions. If you elect to continue to contribute your employer most also continue to make the employer contributions. At present, when Service Canada calculates the amount of benefit you are entitled to, the “drop-out” is 15 percent of your contributory period when your earnings were at their lowest. This is seven years of low earnings that would be removed from the calculation. Starting in 2012, this low-earning drop-out will increase to 16 percent allowing up to 7.5 years of your lowest earnings to be dropped from the calculation, which is likely to increase your benefit amount. In 2014, the percentage will increase again to 17 percent allowing up to eight years of your lowest earnings to be dropped from the calculation. Currently there is a rule that says if want to begin CPP retirement benefits early you need to either stop working or have significantly reduced earnings for at least two months. This rule is called the “work cessation test.” For many Canadians it was very easy to work around. In 2012 the rules disappear and anyone can elect to start retirement benefits regardless of income. Deciding when to trigger CPP retirement benefits should be made in a broader context. Many factors need to be considered including your income requirement and how will this change over time. People who are wrestling with these changes and how they affect them should seek the assistance of a Certified Financial Planner who focuses on these issues. A competent professional will address this question in the context of a comprehensive plan and, by doing so, ensure you make the right decision. A comprehensive plan is one that addresses lifestyle, estate, investment and risk management needs in a way you understand and empowers you to make strong decisions. The peace of mind that comes from building a well thought-out financial plan is well worth the effort. It can be scary to make a decision about when to take CPP when it is an isolated issue; as part of discussion of your entire situation, it is not scary at all. Steve Malette, CFP, is with Horizon Partners Ltd. in Sudbury.
