Friday, April 15, 2011

Will changes to CPP alter retirement and working patterns?

Canada’s social security program, the Canada Pension Plan (CPP) is changing. The changes could alter the retirement plans of those nearing retirement age and this may have consequences on the number of older Canadians who chose to continue to work past “normal retirement age”. Because some workers’ compensation systems use planned retirement ages for the determination of benefits and because the health and safety issues of older workers are complex, these changes may have important implications.

What are the changes? There are several but I want to focus on (a) changes regarding the penalties, and (b) incentives regarding the start of retirement benefits.

Prior to 2011, CPP retirement pensions were reduced by 0.5% per month for each month before age 65 that a contributor started to receive the CPP retirement benefit. For each month beyond the age of 65 that a contributor to the plan delayed the start of retirement benefits, a 0.5% increase per month was applied to the base retirement pension amount payable at age 65. So, prior to 2011 and using CPP at age 65 as the comparison, your CPP amount would be 30% lower if you started your CPP at age 60 or 30% higher if you delayed the start of your CPP to age 70.

Beginning in 2011, there are some increased incentives for delaying retirement beyond 65, and, beginning in 2012, there are some larger penalties for starting CPP retirement pensions under 65. The reductions and increases are being phased in but by 2016 that phase-in process will be complete. Here are the tables summarizing the changes:
• percentage reduction in monthly CPP commenced under 65:
Year % (monthly reduction)
2012 0.52
2013 0.54
2014 0.56
2015 0.58
2016 0.60

• percentage increase in monthly CPP commenced over 65:
Year % (monthly increase)
2011 0.57
2012 0.64
2013 0.70

By 2013, there will be a 42% advantage to starting CPP at age 70, and by 2016 a 36% disadvantage to commencing CPP retirement benefits at age 60 when compared to the benefit payable at age 65.

That’s the background. Now, what will this do to retirement patterns?

Some people are going to be re-thinking their retirement plans. For those who are or will be 60 in 2011 and were thinking about starting CPP, they may decide to commence CPP retirement benefits before the slightly larger reductions come into play. The difference is not great but starting in 2012, the penalties are just a little larger for each month before age 65 you retire...and the incentives just a little bigger for each month you delay.

Clearly, these changes are intended to encourage those in the labour force to continue working longer than at present. Other changes, including the post-retirement benefit for those who have retired then return to work, have the same impact of encouraging longer participation in the labour force.

Overall, these changes are not likely to cause a massive swing in retirement patterns. For those with large RRSP or defined benefit plans, these changes are not likely to have a big impact on their retirement plans. The changes will, however, be important to many workers for whom CPP will be the main source of retirement income, particularly those who turn 60 after 2011 and those still working over the age of 65.

The average retirement age for Canadians is about 63 at present. For those planning on using CPP retirement as a major part of their retirement income, age 70 may become an attractive target as their planned retirement date. And that will raise important issues in both compensation policy and prevention efforts for older workers.

For more information on the amendments to CPP, see the Human Resources and Skills Development Canada web page

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