Amendments to the Canada Pension Plan
Every three years, federal, provincial and territorial Finance ministers review the Canada Pension Plan (CPP) to determine if benefits and/or contribution rates should be changed. They base their recommendations on a number of factors, including whether or not the Plan is meeting the needs of Canadians. Following their review of the CPP in May 2009, the ministers unanimously recommended changes to the CPP to enhance flexibility and to support both older and younger workers in a fair and affordable way.
The CPP is adapting to better reflect how Canadians choose to live, work and retire. People take many different paths to retirement today, and these changes to the Plan better recognize that retirement is often a process that occurs in stages, rather than a one-time event. In addition to remaining financially sustainable, the CPP must also continue to meet the changing needs of Canada’s diverse and aging population and ever-evolving labour market. These changes are affordable at the current CPP contribution rate.
The amendments to the CPP were introduced in Bill C-51, the Economic Recovery Act (stimulus), which received Royal Assent on December 15, 2009. Stewardship of the CPP is a joint federal-provincial responsibility. Provincial and federal Orders in Council to bring the changes into force are in place. The changes are being implemented gradually over a six-year period that started in January 2011, with full implementation in 2016.
The changes to the CPP may affect how and when contributors choose to retire from work and when they decide to apply for a CPP retirement pension. These decisions will depend on individual circumstances. Some key considerations include:
- employment opportunities;
- other retirement income;
- health of contributors and their families; and
- retirement goals.
The changes to the CPP are described below.
Canada Pension Plan (CPP)
What are the highlights of the changes to the CPP?
The following are the key changes to the CPP.
Changes to the actuarial factor for early and late retirement
The actuarial factor is the adjustment made to retirement benefits based on whether a person retires before or after age 65. If a person retires before age 65, the actuarial factor lowers the retirement benefits, as that person will likely collect benefits for a longer period of time and has contributed for fewer years than someone who retires at age 65. In comparison, the actuarial factor increases the retirement benefits for a person who retires after age 65, as that person will likely collect benefits for a shorter period of time and has made additional contributions.
There are gradual changes taking place in the adjustments for early and late receipt of the CPP retirement pension to restore actuarial fairness. This will further increase the pension for those who start receiving it after age 65, and further reduce it for those who start receiving it before age 65 to ensure there are no unfair advantages or disadvantages to early or late receipt of CPP retirement benefits. The changes in the pension adjustments are being phased in gradually over a number of years, which started in 2011 and will be at their actuarially fair levels by 2016.
CPP retirement pensions will be higher if taken after age 65
- Before the changes, CPP retirement pensions increased by 0.5% for each month after age 65 (up to age 70) that contributors delayed receiving them. For example, if contributors started receiving their CPP pensions at the age of 70, their pension amounts were 30% more than if taken at age 65.
- From 2011 to 2013, the Government is gradually increasing this percentage from 0.5% per month (6% per year) to 0.7% per month (8.4% per year). This means that by 2013, if contributors start receiving their CPP pension at the age of 70, their pension amounts will be 42% more than if taken at age 65.
- The following table outlines the increase in the monthly actuarial factor for each year.
Year
% (monthly increase)
2011 0.57 2012 0.64 2013 0.70
CPP retirement pensions will be lower if taken before age 65
- Before the changes, CPP retirement pensions were reduced by 0.5% for each month before age 65 that contributors began receiving them. For example, if contributors started receiving their CPP pensions at the age of 60, their pension amounts were 30% less than if taken at age 65.
- • From 2012 to 2016, the amount by which a contributor’s early pension will be reduced is gradually increasing from 0.5% per month (6% per year) to 0.6% per month (7.2% per year). This means that by 2016, if contributors start receiving their CPP pensions at the age of 60, their pension amounts will be 36% less than if taken at age 65.
- The following table outlines the increase in the monthly actuarial factor for each year.
Year
% (monthly reduction)
2012 0.52 2013 0.54 2014 0.56 2015 0.58 2016 0.60
Changes to the general drop-out provision
Virtually all contributors are entitled to the general drop-out provision, which allows them to exclude a portion of their years of 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 in 2012, the number of years of low or zero earnings that are automatically dropped from the calculation of CPP pensions is being increased.
- Before the changes, when Service Canada calculated average earnings over a contributor’s entire career (from age 18 until retirement), 15% 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.
- As of 2012, the percentage of low earnings has increased to 16%, 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%, which may allow up to eight years of a contributor’s lowest earnings to be dropped.
Elimination of the Work Cessation Test
As of 2012, contributors begin receiving their CPP retirement pensions without any work interruption. The elimination of the Work Cessation Test makes it easier for Canadians to make a phased transition to retirement.
Introduction of the Post-Retirement Benefit
As of 2012, if contributors are receiving CPP retirement pensions and they choose to work, they can continue to make CPP contributions that will increase their payments through the Post-Retirement Benefit (PRB). If they are under age 65, contributions are mandatory for them and their employers. If they are age 65 to 70, contributions are 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.
- Self-employed beneficiaries will pay both employee and employer portions.
- Working CPP retirement pension recipients who choose not to contribute to the Plan after age 65 are required to inform the Canada Revenue Agency and their employer (visit the Canada Revenue Agency for more information).
- Contributions made while beneficiaries are receiving their CPP retirement pensions build up only the PRB. These contributions do not create eligibility or increase the amount of other CPP benefits, nor are they subject to a credit split or retirement pension sharing.
- Each year of work provides an additional PRB that begins the following year and is paid for life. Like other CPP benefits, the PRB rises with increases in the Consumer Price Index, providing protection from increases in the cost of living.
- The PRB is added to an individual’s CPP retirement pension, even if the maximum pension amount is already being received.
Technical Presentation
To learn more about the changes which are currently being implemented to the CPP at a technical level, view the technical presentation.
Legislation
To see Bill C-51 in its entirety, visit the Parliament of Canada website
How will the changes affect me?
To find out how the changes to the CPP may affect you, visit the Service Canada website.