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Canada Pension Plan (CPP) Changes
There are several changes coming for the CPP
retirement pension. The changes will not
affect anyone who is currently collecting the CPP retirement,
disability or survivor benefits. It will also not affect anyone who
starts to collect their pension prior to 2012.
The changes were included in Bill
C-51, which received Royal Assent on December 15, 2009.
A person's CPP retirement pension is
calculated as 25% of his average pensionable earnings during his
contributory period. The contributory period starts when he turns
18, or 1966, whichever is later. The contributory period ends when
he starts collecting the pension.
Removal of the Work Cessation Test
Before 2012, in order to qualify to collect the CPP retirement
pension before age 65, a person must have reduced earnings for the month prior to
collecting the pension, and the following month.
Starting in 2012 - the Work Cessation Test will
be removed. No reduction in earnings will have to take place in order
to collect the benefits prior to age 65.
Increase in the General Low Earnings Drop-Out
If a person starts collecting CPP at age 60, the
contributory period is 42 years, and at age 65 would be 47 years.
However, adjustments are made to the contributory period and average
pensionable earnings by "dropping out" certain periods of low
income. This applies to periods where the person is on a CPP
disability pension, or when income is low or zero during child
raising years (the child-rearing dropout).
Before 2012, there is a general drop-out of 15% of the contributory years which are low
or nil for other reasons. For individuals who start their CPP at age
65, this removes almost 7 years of low or zero earnings from the
calculation. This increases the average earnings and
CPP retirement pension for every person.
Starting in 2012 - increase the general drop-out
rate to:
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16% in 2012, allowing a maximum drop-out of almost
7.5 years |
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17% in 2014, allowing a maximum drop-out of 8
years. |
This change will also increase the average CPP
disability and survivor pensions, which are based on the retirement
benefit calculation.
CPP Contributions When Receiving Retirement Pension
Currently, CPP contributions are no longer paid
once a person is receiving a CPP retirement pension, or once the person is
70, whichever is earlier.
Future - CPP retirement benefit
recipients will be required to continue to make CPP contributions until age 65.
Those age 65 to 70 will be able to elect not to continue contributing to
the CPP. CRA states that
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These contributions will result in increased
retirement benefits, even for persons already receiving the maximum
pension amounts. |
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The additional benefits would be earned at a rate
of 1/40th of the maximum pension amount ($10,905 in 2009) per year of
additional contributions. The exact amount would depend on the
earnings level of the contributor, and the resulting pension could be
above the maximum. |
Pension Adjustments for Early and Late CPP Take-Up
Before 2012, when the CPP retirement pension is
taken early, it is reduced by 0.5% per month for each month that the
pension is taken before the 65th birthday. The pension is reduced by
30% (5 years x 12 months x 0.5%) for a person who starts collecting it at
age 60.
The late pension is increased by 0.5% per month up to
the age of 70. The pension is increased by 30% for a person who
waits until age 70 to start collecting it.
Starting in 2012 the
percentage amounts used to reduce or increase the early or late taken
pensions will be gradually increased. To do this:
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The early pension reduction would be gradually
increased to 0.6% per month for each month that the pension is taken
before age 65. This would be done over a period of 5 years,
starting in 2012. This would result in the pension being reduced
by 36% for a person who begins collecting it at age 60 after 2017. |
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The late pension augmentation would be gradually be
increased to 0.7% per month for each month that the pension is taken
after the 65th birthday, up to age 70. This would be done over a
period of 3 years, starting in 2011. This would result in the
pension being increased by 42% for a person who begins collecting it
at age 70 after 2014. |
This change would not affect those currently collecting
CPP retirement benefits or those taking their benefit before these changes
begin to take effect.
For more information, see the Department of Finance Information
Paper on Proposed Changes to the Canada Pension Plan.
Tax Tip: You
don't know how long you will live, so we still recommend taking your CPP
retirement pension at age 60.
Revised: December 17, 2009
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