An earlier blog post dealt with CPP contribution changes effective January 1, 2012. This post will deal with changes to the Canada Pension Plan (CPP) benefits and the Post-Retirement Benefit that your employees need to know.
Employees who have contributed to the plan accumulate credits in order to qualify for CPP benefits. Normal benefits are available at age 65 and reduced benefits become available as early as age 60. Employees may continue to work and contribute to the plan until age 70 and can increase their CPP credits by deferring receipt of their benefits to age 70. The plan provides retirement benefits, disability benefits, and survivor benefits to the families of deceased employees. Pension benefits are indexed to recognize a portion of changes in the cost-of-living as measured by the Consumer Price Index (CPI).
Significant changes to the Canada Pension Plan (CPP) will occur in January 2012 to reflect the way Canadians are living, working, and retiring. Changes to CPP retirement pension benefits began in 2011 and will continue to be phased in until 2016. For employers, any changes to employees’ decisions regarding retirement dates will affect their manpower planning. Thus, employers who have employees who are or may be contemplating retirement in the next few years will want to ensure that those employees understand these changes in advance of any planned or expected retirements.
Starting in 2012, if contributors are receiving CPP retirement pensions and they choose to work, they could continue to make CPP contributions that will increase their payments through the Post-Retirement Benefit (PRB). The newly-created PRB will be comprised of contributions made while contributors are receiving their CPP retirement pensions. If they are under age 65, contributions will be mandatory for them and their employers. If they are age 65 to 70, contributions will be voluntary (their employers will have to contribute if they do). People between the ages of 60 and 70 who make these contributions may begin to receive the PRB the following year. The PRB will be added to an individual’s CPP retirement pension, even if the maximum pension amount is already being received
If your employees are planning to retire or phase-in their retirement, this is the information they need to know to make an informed decision on when to retire.
General drop-out provision
Virtually all contributors are entitled to the general drop-out provision, which allows them to exclude a portion of their zero or low earnings from the calculation of their retirement benefit. Because work interruptions occur for a variety of reasons, including involuntary job losses, and because time out of the labour force can lower the amount of one’s CPP pension, the pension formula is being enhanced to exclude up to eight years of low earnings under the general drop-out provision.
Starting January 1, 2012, the number of years of low or zero earnings that are automatically dropped from the calculation of CPP pensions will increase.
Before the changes, when Service Canada calculated average earnings over a contributor’s entire career (from age 18 until retirement), 15 percent of the contributor’s career period with the lowest earnings was automatically dropped. Under this provision, if contributors took their CPP retirement pension at 65, up to seven years of their lowest earnings were automatically dropped from the calculation of their average earnings. Starting in 2012, the percentage of low earnings will increase to 16 percent, which may allow up to 7.5 years of a contributor’s lowest earnings to be dropped from the calculation. In 2014, the percentage will increase to 17 percent, which may allow up to eight years of a contributor’s lowest earnings to be dropped.
Obtaining CPP retirement benefits
A retiring employee must apply for CPP retirement benefits. Applications are available at local Service Canada Centres or on the Service Canada website.
Age 60 to 65 – Prior to 2012, employees applying for a retirement benefit before turning 65 had to establish that they wholly or substantially ceased to be engaged in paid employment or self-employment immediately before the pension started (this was called the “work cessation test”). This effectively precluded the ability for anyone under age 65 from continuing to work in their current position while electing to collect a CPP pension.
Effective January 1, 2012, the work cessation test no longer applies. Employees may elect to take their CPP pension as early as age 60 without having to interrupt their earnings. That said, those under 65 collecting their pension prior to 2012 must start contributing again in 2012 if they are earning pensionable earnings. This results in the contributions increasing the post-retirement benefit, even for persons already receiving the maximum pension amount. Persons between the ages of 65 and 70 may elect to not make further contributions to the CPP.
Age 65 to 70 –Employees reaching the age of 65 are immediately eligible for CPP retirement benefits. It is not necessary to have ceased, or substantially ceased, paid employment or self-employment. Employees may work and continue to contribute to CPP until age 70. Benefit credits are not made beyond age 70. Application for benefits must still be made to the Service Canada website.
The monthly CPP retirement pension amount increases by a higher percentage if taken after age 65. The monthly CPP retirement pension amount decreases by a larger percentage if taken before age 65.
Collecting CPP Pension before age 65
Previously, if employees elected to receive their CPP pension before age 65, their benefits would be reduced by 0.5 percent for each month (6 percent per year) that their pensions commenced before age 65. Starting in 2012, pensions will be reduced by 0.6 percent for each month (7.2 percent per year) that employees elect to commence their pension before age 65 (i.e. an employee’s pension would be reduced by 36 percent if he or she elected to receive it at age 60). For a person who applies for and receives their CPP retirement pension at age 60, this represents a maximum reduction of 31.2 percent in 2012, 32.4 percent in 2013, 33.6 percent in 2014, 34.8 percent in 2015, and 36 percent in 2016.
Collecting CPP pension after age 65
Previously, for each month after age 65 that employees delayed collecting their CPP pensions, the pension benefits increased by 0.5 percent per month (6 percent per year). Commencing January 1, 2011, for each month after age 65 that employees delayed collecting their CPP pensions, their pension benefits increased by 0.7 percent per month (8.4 percent per year). This means that if employees delayed collecting their CPP pensions until age 70, their benefits will be 42 percent greater than if they had started collecting them at age 65. For a person who starts receiving the retirement pension at age 70, this adjustment represents a maximum increase of 34.2 percent in 2011, 38.4 percent in 2012, and 42 percent in 2013.
Sources: Service Canada and The Human Resources Advisor
First Reference Human Resources and Compliance Managing Editor