Change is in the air. The Canada Pension Plan, that so-called pillar of Canada‚Äôs retirement income system, is in line for a major over-haul. Every three years the Canada Pension Plan gets reviewed by the collective wisdom of the federal, provincial and territorial finance ministers. On May 25, 2009 these Finance Ministers proposed to update the CPP to “better reflect the many different paths people take to retirement today.”
Note that these changes will not affect anybody already receiving their Canada Pension.
Currently, you can choose to take an early retirement pension at the age of 60. ¬†In order to take an early retirement pension, you must currently either stop working for a month, or reduce their earnings for two months in a row. ¬†Their is no need to stop working or reduce your ¬†earnings if you wait until you are 65 to begin your Canada Pension. ¬†Under the proposed changes, you will no longer need to reduce your earnings or stop work to take an early pension. ¬†This is obviously good news. ¬†Many people who wanted to take an early retirement pension found it rather difficult to take a whole month off work, or cut their earnings way back for two whole months.
Another positive change is to increase the ¬†low earnings drop out provision. ¬†Currently, when you initially apply for your Canada Pension, they will drop out 15 percent of the years when your income was low (e.g. you didn’t work that year, had low earnings, or whatever.) ¬†By dropping those low income years, your Canada Pension will be higher since it isn’t being dragged down by those ¬†low income years. ¬†Under the proposed ¬†changes, they will begin to drop out 17% of the low income years.
The next proposed change is quite radical. ¬†At this point, when you begin receiving your Canada Pension, you also stop paying Canada Pension premiums. ¬†That means that you simply stop into the system. ¬†Under the proposed changes, if you take an early pension (between the age 60 – 64) you will be required to continue paying into CPP if you are still working. ¬†And, if you are 65 or over, you have the option to continue paying into CPP. ¬†By doing so you will increase your pension benefits.
The last proposed change is probably the least beneficial. ¬†Currently, if you take an early retirement pension your pension is reduced by 0.5% per month that the pension is taken before your 65th birthday. ¬†That will be changed to a reduction of 0.6% per month. ¬†On the flip side, you are currently allowed to delay starting your Canada Pension until as late at age 70. ¬†By delaying it, you will currently increase your pension by¬†0.5% per month. ¬†That is proposed to be changed to an increase of¬†0.7% per month.
I’ve never yet heard of anybody delaying their Canada Pension past age 65. ¬†I’d be curious to see what the stats are, showing what the average age is of a Canada Pension applicant. If anybody has access to these stats please let me know.
Also, please be aware that these proposed changes will be rolled out gradually over a few years. ¬†For full details and some interesting examples, go to¬†http://www.fin.gc.ca/n08/data/09-051_1-eng.asp
Filed under: Other tips
, Personal Tax
by David Boese
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