Canada Pension Plan: When can you take it and when should you?
When George turned 65, he got a present he’d been awaiting for years: his first Canada Pension Plan cheque. When it arrived, it all but blew out the birthday candles.
George (not his real name) had been a senior manager at major corporations most of his career, and made more than $100,000 in his best years. Despite that long history of sizeable earnings, he was shocked to find that he didn’t qualify for the maximum CPP benefit.
The problem? He lost his job at 60 in a corporate shuffle, and found only part-time work in the years left before his retirement. Those low-income years had taken a toll on his CPP benefits.
A cautionary tale, but likely not uncommon.
This article was published by The Toronto Star on February 7th, 2013. To see this article and other related articles on their website, please click here
While Canadians cherish and depend on the CPP, few of us fully understand it. We agonize over when to take it; we over- or underestimate how much we’ll get; we even doubt it will be around when we retire.
So let’s try to answer some of the most common questions about the CPP.
- Will it be there when I need it? The answer is, “Yes.” In 2010, the government’s chief actuary confirmed that the CPP is sustainable for the next 75 years, despite bumpy investment returns and millions of baby-boomers retiring.
Reforms made back in 1998 did a good job of positioning the plan for the long term, says Bernard Dussault, former chief actuary of the CPP. While it is not fully funded, revenues should match projected payouts without increasing the contribution rate (9.9 per cent of your income, half of which is paid by your employer).
As well, the provincial premiers are now mulling a new reform that would increase the future CPP benefit from 25 per cent to 35 per cent of your average earnings. Those bigger pension cheques would push up your contribution rate, however, to about 12 per cent of earnings.
- How much will I get? This is a subject rife with misinformation. Some believe your benefits depend on your five highest-earning years, or your last five years.
The truth is, Service Canada, which administers the CPP, looks at your entire working life, from age 18 until you take your pension. It “drops out” up to 7.5 of your lowest-earning years (you can apply to exclude extra low-earning years if you were disabled or raising young children). Then, it bases your CPP benefit on an average of your lifetime earnings.
You get the biggest benefit by earning the maximum pensionable income every year ($51,100 in 2013), and making the maximum CPP contribution. If your income is lower, your pension will decrease proportionately by how much less than the maximum you earn over your career.
“If someone had a maximum salary every year, that person would get the maximum CPP,” says Dussault. But, he adds, “suppose your earnings were 95 per cent of the maximum each year. Then your pension would be equal to a little more than 95 per cent (of the maximum), because of the drop-out provision.”
You can get a current estimate of how much you’re likely to receive by contacting Service Canada (servicecanada.gc.ca, 1-800-277-9914). As well, you should get a statement of your CPP contributions annually.
Once you apply for CPP and find out your final pension amount, you can ask for a review within 90 days, and make further appeals if you disagree with the decision.
This year, the maximum pension is $1,012.50 per month. The pension increases each year along with the rise in the Consumer Price Index.
- When should I take the CPP? You can receive the CPP as soon as you are 60, or as late as age 70. But more than two-thirds of Canadians take it before 65, Service Canada says.
There’s a penalty for taking it early, however, and it’s increasing. In 2013, you lose 0.54 per cent for each month you take CPP before 65; that rises to 0.6 per cent a month in 2016.
So, if you turned 60 this year and took the CPP at the start of the year, your monthly payment would be 32.4 per cent less than if you’d waited till 65. (On the other end, you could raise it by 42 per cent if you delayed until 70.)
However, most experts advise taking CPP as soon as possible. For one thing, you’ll get up to five more years of pension income. Your monthly cheque will be smaller, but the total amount you receive will equal many times the amount you lose each month.
In fact, if you start receiving CPP at age 60 this year, you’ll be ahead of the game until you’re 75, says Jim Yih, a financial educator and owner of the Retire Happy blog.
CPP benefits are taxable, which changes the picture somewhat. But despite that, says Yih, “I’m willing to bet 85 per cent of people should probably still take CPP early.”
As well, he says, “you can’t discount the fact that you have an income during those years.”
- What can affect my CPP? While a few low-income years are automatically deducted from your benefit calculation, any further low-earning years will shrink your CPP cheque. That includes things such as easing into retirement, as many 60-somethings do, or losing your job late in life, as happened to George.
That’s another reason to take it at 60, says Dussault: “You don’t know what your income will be during those years, and if it’s less than it’s been so far, your pension might be based on a lower average.”
And, he adds, you don’t know when you are going to die.
- Do I have to stop working? Due to recent rule changes, the answer is, “No.” You can take CPP and keep working without pause. However, if you continue working, you now have to keep paying into the plan until you are at least 65. In return, you get a supplement to your pension each year.
In summary, love it or hate it, the CPP is part of Canadian life, and when the time comes, most of us are happy to have it.
But it’s better to know what to expect so that first cheque won’t spoil the party.
OAS has changed, too
The CPP is only part of the pension picture for most Canadians; for many, the Old Age Security (OAS) pension plays just as big a part in their retirement income. But, last year, the federal government announced it will raise the age at which we get the OAS and the Guaranteed Income Supplement (GIS).
The good news is if you’re near retirement age, nothing will change. But if you were born after March, 1958, you’ll be getting the OAS later. The increases to the eligibility age are phased in, starting with a few months and building steadily to January, 1962; those born after that date will get their OAS at 67.
If there’s a silver lining, it’s that, starting this July, you can defer taking OAS payments by up to five years, if you’re still working, for example. This earns you a larger pension; deferring the OAS by the full five years can increase your payments from $6,481 to $8,814 a year (using 2012 dollars).
The government says the changes are needed because the number of seniors will almost double by 2030, to 9.4 million. But if you’re in a low income bracket and approaching retirement in 10 years, you may need to tighten your belt.
© Toronto Star