What are the changes being made to the CPP?

Your monthly CPP retirement pension amount will increase by a larger percentage if you take it after age 65. Your monthly CPP retirement pension amount will decrease by a larger percentage if you take it before age 65. If you are under 65 and you work while receiving your CPP retirement pension, you and your employer will have to make CPP contributions. These contributions will increase your CPP retirement benefits. If you are age 65 to 70 and you work while receiving your CPP retirement pension, you can choose to make CPP contributions. These contributions will increase your CPP retirement benefits. The number of years of low or zero earnings that are automatically dropped from the calculation of your CPP pension will increase. You will be able to begin receiving your CPP retirement pension without any work interruption.

Who are affected by the changes? These changes will affect if : an employee who contributes to the CPP, whether you are just starting your career or you are planning to retire soon; a self-employed person who contributes to the CPP; or between the ages of 60 and 70 and you work while receiving your CPP retirement pension (or if you work outside of Quebec while receiving a QPP retirement pension). You will not be affected by these changes if you started receiving a CPP retirement pension before December 31, 2010, and you remain out of the work force.

Note The changes also affect employers who contribute to the CPP on behalf of their employees

http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/ISPB-348-1110_E.pdf

1. Elimination of the Work Cessation Test Prior to 2012, if you took your CPP retirement pension before age 65, but wanted to keep working, you had to either stop working or significantly reduce your earnings for at least two consecutive months, as required by the CPP work cessation test. After a two-month period with employment earnings not exceeding the CPP maximum retirement pension , you could return to work and start earning more, which presented challenges to employees in workplaces that dont guarantee flexibility or work-leave. Most employers, after all, would not readily facilitate a two-month leave to allow an employee to collect CPP and then return to work. For people who chose to collect CPP before 65 but intended to continue working, the work cessation test was an unnecessary and burdensome exercise that forced workers to choose between disrupting their workplace, or taking a significant reduction in pay for a period of two months, both at a financial cost that presumably they could ill afford since they had felt the need to take the early pension in the first place.

Beginning in January 2012, the work cessation test is eliminated. If youre 60 to 64 years old, you will be able to take your CPP retirement pension without having to stop working or reduce your earnings. This change reflects the different ways Canadians retire. Retirement is a process that often occurs in stages, rather than a one-time event. By eliminating the work cessation test, Canadians will be able to transition to retirement gradually and more easily. 2. Introduction of the Post-Retirement Benefit Until the recent CPP changes, once you began to draw your CPP, you could no longer contribute to it and increase your CPP retirement pension even if you continued working. Starting in 2012, if you are receiving a CPP retirement pension and choose to work, you can continue to make CPP contributions that will increase your CPP pension through the PostRetirement Benefit (PRB). This means that the newly-created PRB will be financed through the contributions to the CPP fund made while contributors are receiving their CPP pensions. If you are under age 65, contributions will be mandatory for you and your employer. If you are 65 to 69 years old, contributions will be voluntary, but your employer will have to contribute if you choose to. People 60 to 69 years of age who make these contributions in any given year will begin to see an increase to their pension payments in the following year. This change is consistent with the different ways and reasons people retire. Before, if you chose to or had to retire before 65, there was no way to make up the permanent reductions in your CPP benefit for taking early retirement. Now, you can retire early, choose to work, and continue to build additional, life-long, inflationindexed, CPP pension benefits. The Service Canada website has a calculator [see below] that allows you to measure potential PRB given your age and income and when you intend to stop working. For example, if you are 63 in 2012, already collect your CPP retirement pension, intend to work until 65, and earn in 2012 more than $50,100 (the maximum amount on which to base the CPP in 2012), you will receive each year for the rest of your life, starting in 2013, an additional indexed monthly retirement benefit of $296 ($24.67 per month). It is worth noting that any such additional CPP retirement pension is added to your existing CPP benefit, meaning that your new total benefit could exceed the normal maximum benefit allowable by the CPP.

Much has been made about how long it would take for the increase in pension to pay back the new additional contributions. Some say it is 15.6 years, i.e. the maximum CPP combined contribution of $4,613.50 for 2012 divided by the maximum additional pension of $296 for 2012. However, this calculation does not take into account the value of each future annual indexation increase, which reduces the number of years from 15.6 to 12.3 assuming a 2% annual indexation rate. In looking at such measures, one must consider that the CPP retirement benefit lasts after the death of the pensioner if upon death he/she leaves an eligible surviving spouse to whom a lifetime indexed 50% surviving spouse pension then becomes payable. In other words, the price charged for the additional CPP benefits is fair, especially considering that: it was determined using the favourable long term actuarial assumption of the plan, effectively a 4% real rate of return on investments; the underlying additional benefits are fully guaranteedfor life; This is the only inflation-indexed annuity available on the market. The raft of CPP changes also adjusted the level of pension reduction for early [pre-65] pensions and of the increase for late [post- 65] pensions. Taking effect in 2011, early pensions are now reduced by up to 36% and late pensions carry an increase of up to 42%. The previous levels of decrease and increase were 30% at both age 60 and age 70. The changes were introduced without much public discussion or warning, so it is not surprising that it came as unwelcome news to people who had planned to take an early pension under the old rules, anticipating that they could get five extra years of a reduced CPP pension without having to make any additional contributions, to now discover that they will have to make CPP contributions for those years, albeit with an increase to their annual pension benefits. This would be particularly annoying for the self-employed who pay both the employers and employees contributions. Individuals who took the reduced pension before 2009 when the CPP changes were announced and will still be under 65 in 2012 when the required contributions take effect might be disappointed by the onus put on them to contribute to CPP at least until age 65 if they have employment earnings, even if, as indicated above, these additional contributions provide an advantageous level of additional lifetime guaranteed retirement benefits. These people would have taken the 30% [versus todays 36%] discount on their pension for the last three years and will have to pay the new contributions for a maximum of 2 years until they reach 65. They have a fair argument that they should be

grandfathered since they made their choice under the old rules. Anyone choosing to take a reduced pension after 2009 would be covered under the new rules and would be able to weigh the options with all the information. In total, the changes serve the stated purpose of improving the long-term financial sustainability of the CPP while helping people who keep working after drawing their CPP pension to contribute and build up further their pension benefits.
http://www.carp.ca/2011/12/20/need-to-know-cpp-changes-in-2012/

The amendments to the CPP will include the following: The monthly CPP retirement pension amount will increase by a higher percentage if taken after age 65. The monthly CPP retirement pension amount will decrease by a larger percentage if taken before age 65. The number of years of low or zero earnings that are automatically dropped from the calculation of the CPP pension will increase. Contributors will be able to receive their CPP retirement pension without any work interruption. Post-Retirement Benefit.

CPP contribution rate.

The monthly CPP retirement pension amount will increase by a higher percentage if taken after age 65
There will be a gradual restoration of the CPP retirement pension adjustments to their actuarially fair levels for the take-up of the pension. This will further increase the pension for those who start receiving it late (after age 65 and up to age 70), and further reduce it for those who start receiving it early (between the ages of 60 and 64). This ensures that there are no unfair advantages or disadvantages to early or late take-up of CPPretirement benefits. These changes to the pension adjustments will be phased in gradually over a period of six years, starting in 2011 and ending by 2016. Before the changes, a CPP retirement pension increased by 0.5% for each month afterage 65 (and up to age 70) that an individual delayed receiving it. This meant that an individual who started receiving their CPP pension at 70 received 30% more than if they had taken it at 65. From 2011 to 2013, the Government of Canada will gradually increase this percentage from 0.5% per month (6% per year) to 0.7% per month (8.4% per year). This means that, by 2013, an individual who starts receiving their CPP pension at the age of 70 will receive 42% more than if they had taken it at 65. The following table shows the percentage by which your retirement pension will increase, for each month after age 65 that you delay taking your pension. These percentages will change every year until 2013. For example, if you retire in 2011, your retirement pension will increase by 0.57% for each month after age 65 that you postpone taking it. Year of retirement % (monthly increase) 2011 2012 2013 0.57 0.64 0.70

For a person who starts receiving the retirement pension at age 70, this adjustment represents a maximum increase of 34.2% in 2011, 38.4% in 2012, and 42% in 2013.

The monthly CPP retirement pension amount will decrease by a larger percentage if taken before age 65
Before the changes, a CPP retirement pension was reduced by 0.5% for each monthbefore age 65 that an individual began receiving it. This meant that an individual who started receiving their CPP pension at 60 received 30% less than if they had waited to take it at 65. From 2012 to 2016, the Government will gradually change this early pension reduction from 0.5% to 0.6% per month. This means that by 2016, an individual who starts receiving their CPP pension at the age of 60 will receive 36% less than if they had taken it at 65.

The following table shows the percentage by which your retirement pension will decrease, for each month before age 65 that you begin receiving your pension. These amounts will change every year until 2016. For example, if you retire in 2012, your retirement pension will decrease by 0.52% for each month before age 65 that you begin receiving it. Year of retirement % (monthly reduction) 2012 2013 2014 2015 2016 0.52 0.54 0.56 0.58 0.60

For a person who applies for and receives their CPP retirement pension at age 60, this represents a maximum reduction of 31.2% in 2012, 32.4% in 2013, 33.6% in 2014, 34.8% in 2015, and 36% in 2016.

The number of years of low or zero earnings that are automatically dropped from the calculation of the CPP pension will increase
Before the changes, when Service Canada calculated an individuals average earnings over their contributory period (from the earliest of January 1, 1966, or age 18 until the effective date of their retirement pension if effective before the age of 70), 15% of their lowest earnings were automatically dropped. This is called the general drop-out provision. Under this provision, if someone took their CPP retirement pension at 65, up to 7 years of their lowest earnings were automatically dropped from the calculation of their average earnings. Starting in 2012, the percentage of low earnings will increase to 16%, allowing up to 7.5 years of the lowest earnings to be dropped from the calculation, which will likely increase the benefit amount. In 2014, the percentage will increase again to 17%, allowing up to 8 years of the lowest earnings to be dropped from the calculation. This change will benefit all CPP contributors who are eligible for CPP benefits in 2012 or later.

Contributors will be able to receive their CPP retirement pension without any work interruption
Starting in 2012, contributors no longer have to stop working or significantly reduce earnings for two consecutive months to receive the CPP retirement pension before the age of 65. This will make it easier for Canadians to make a gradual transition to retirement.

CPP contribution rate

The CPP is financed through mandatory contributions from virtually all workers and their employers, including self-employed contributors, as well as revenue generated from

investments. The combined contribution rate is 9.9% of earnings between the Years Basic Exemption ($3,500) and the Years Maximum Pensionable Earnings ($47,200 in 2010). The contribution rate is split equally between employees and employers so that the maximum amount paid by employees and employers per year is $2,163.15 (2010) each. The self-employed pay both the employee and employer share of the contributions (maximum contribution of $4,326.30 in 2010). The changes being implemented from 2011 to 2016 are affordable within the current CPPcontribution rate of 9.9%. The Chief Actuary of Canada estimates that the CPP, including the changes being implemented, is sustainable at the current rate of contribution for the next 75 years (as of the 24th CPP Actuarial Report). To give Canadians enough time to plan, these changes will be introduced gradually.

http://www.servicecanada.gc.ca/eng/isp/cpp/postrtrben/advisors.shtml