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 Your
Money Matters
July
2009 Issue
Proposed Changes To The CPP Will Provide More Flexibility For Those
Who Ease Into Retirement
One
of the changes would adjust the level of benefits; rewarding those
who postpone beyond age 65, and scaling back income for those who
take their benefits early.
Currently,
the CPP benefits paid before age 65 are reduced by 0.5% for each
month before their 65th birthday. Likewise, those taking their
benefits after age 65 are compensated 0.5% for each month past their
65th birthday, up to age 70. The adjustment accounts for the fact
that early retirees make CPP contributions for fewer years and
receive benefits over a longer period.
Under
the proposed changes, which would be implemented gradually beginning
in 2011, those collecting early would see their CPP payments reduced
by 0.6% per month. As a result, someone who begins to collect at age
60, would receive a pension that is 36% lower than the amount they
would receive if they began at age 65. Under the existing rules, the
decrease is 30%. Meanwhile, the pensions of those retiring later
would be increased by 0.7% per month after they turn 65. This means
that someone who begins receiving benefits at age 70 would receive a
pension that is 42% higher versus 30% under the existing rules.
To
illustrate the impact of the change, the government says that a
woman entitled to receive an annual CPP benefit of
$6,410.per year
at age 65 would receive $538. more per year (or $44.83 per month) if
she delayed the benefits until age 66, representing $153. ($12.75
per month) more than the current rules. If she were to take her
benefits at age 60, under the new rules, those benefits would be
decreased by 36% or $461.52 per year ($38.46 per month) compared to
30% or $384.60 per year ($32.05 per month).
The
federal government says the reason for the proposed changes is to
restore the pension adjustment to their “actuarially fair” levels
and that the current levels have been left unchanged since 1987
despite significant shifts in the economic and demographic factors.
Some actuaries are saying the change is to encourage Canadians to
stay in the workforce longer.
Other
CPP changes proposed by Ottawa would offer greater flexibility in
retirement. One proposal would eliminate the “work cessation test,
which requires individuals who apply to take their CPP benefit early
either to stop work or reduce their earnings. By removing the test,
individuals could take their CPP benefits as early as age 60 without
any work interruption. This change could allow individuals to use
CPP income to phase into retirement or supplement their earnings.
However, if you continue working while receiving benefits, one of
the proposed changes would require that both the beneficiary and the
employer continue making contributions until the worker’s 65th
birthday.
The
final change proposed by Ottawa would improve the basic retirement
pension for all CPP contributors by increasing the “general low
earning dropout years” allowing for contributors to exclude up to
eight years of low earnings caused by unemployment, post-secondary
attendance or other reasons, up from the current limit of seven
years.
Although
the dollar impact of the proposed changes are fairly small, the ones
who will be more affected are the low-income individuals who are
looking to CPP for a more substantial part of their retirement
income.
Theresa Wever and the Money
Concepts Team.
Commissions, trailing commissions, management fees and expenses all
may be associated with mutual fund investments. Please read the
prospectus before investing. Mutual funds are not guaranteed, their
values change frequently and past performance may not be repeated. |
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Vankleek Hill, ON K0B 1R0
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