Tag Archives: Canada Pension Plan

Canada needs more CPP says lawyer Ari Kaplan

By Sheryl Smolkin

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As part of the ongoing series of podcast interviews on savewithspp.com, today I’m talking to lawyer Ari Kaplan, a partner in the Pension and Benefits Group of the Toronto law firm Koskie, Minsky, L.L.P.

Ari is the author of Canada’s leading textbook on pension law, and he has acted as counsel in some of Canada’s most widely known pension cases before the Supreme Court of Canada. In addition, he teaches pension law as an adjunct professor of law at both the University of Toronto and Osgoode Hall Law School.

In his spare time, Ari heads up licensing and publishing at Paper Bag Records, a leading, independent record label and artist management company also based in Toronto.

Today, we are going to talk about the Canada Pension Plan. In the ongoing national debate regarding how Canadians can be encouraged to save more for retirement, Ari is a staunch advocate for an expansion to the Canadian Pension Plan.

Welcome, Ari, and thanks for talking to me today.

My pleasure, Sheryl. Thanks for having me.

Q: How many Canadians currently have workplace pension plans?
A: Well, that’s a good question to put everything in perspective. Over 60% of working Canadians actually have no workplace pension plan, and they must rely solely on CPP and their own personal savings for their retirement income. 

Q: Why do you think that an enhanced Canada Pension Plan is the best way to give Canadians a more robust retirement income?
A: Very simple. It’s currently the only universal and mandatory savings scheme in the country. It’s portable from job to job. If you’re a student, you can work for the summer in British Columbia and then come back to a full-time job in Ontario, and your CPP credits will go with you. Also, it doesn’t just cover employees. It applies to self-employment, which most workplace pension plans don’t.

Q: As early as 2008, industry guru Keith Ambachtsheer wrote a C.D. Howe Institute commentary about the benefits of enhancing the Canada Pension Plan. Yet, in December 2013, the conservative government in several Canadian provinces voted against this proposal. Why do you think this occurred?
A: Every respected economist in the country supports a CPP expansion. The reason why the current government did not support it is political, not principled.

There was political pressure from business lobby groups who did not want to be forced to contribute employer revenue toward their employees’ retirement. There was political pressure from the financial services lobby, because they do not benefit at all when the retirement savings of Canadians is held in the CPP Trust Fund.

And finally, there’s fear among Canadian voters, who’ve been led to believe that anything opposed by business must be bad for them, too. Some of them also don’t want to be forced to save for retirement.

Q: Instead of expanding the CPP, the late finance minister, Jim Flaherty and the provinces endorsed pooled registered pension plan legislation as the way to encourage Canadians to save more for retirement. What are the key features of PRPPs?
A: Good question. PRPPs are basically like voluntary employer-sponsored group RRSPs. The funds are locked in, so it resembles a registered defined contribution plan. Your funds can also be ported to another plan and there are survivor benefits. So, it’s basically like an “RRSP-plus.”

Q: Why do you think that PRPP’s are not the answer?
A: Well, I think PRPPs are just a prime example of what I said earlier ­­­– political lobbying by business and the financial industry.

  1. The employer is not required to contribute a dime even if the company voluntarily sponsors a PRPP.
  2. An employee can opt out, or voluntarily set their contribution rate to zero, which gives zero benefit to the employee.
  3. There’s very little benefit security. Like I said, it’s like a DC plan, so you get to choose member-directed investment funds. If you don’t invest your money well, then you won’t get a good pension.
  4. The cost structure is really not that much different than a 500-member group RRSP. The management expense ratio (MER) will be much higher under a PRPP than under a large workplace pension plan or, for that matter, under CPP, where the efficiencies of scale are such that the costs are very, very, very low.
  5. It will create a huge windfall to insurance companies and other financial institutions who manage these funds, because there’s very few cost controls. There are lots of problems in group RRSPs with so-called “hidden fees” and there’s no indication that that will change with PRPPs.

I can go on, but I think you get the idea.

Q: Groups such as the Canadian Federation of Independent Business say that required employer contributions to an expanded CPP would amount to a significant payroll tax that could slow down economic growth. How would you respond to this statement?
A: To be quite blunt, this is a false and misleading statement. Anyone who tells you it’s a tax is not telling you the truth. This is employee money. It goes into a pension fund. It then goes back to the employee.

Q: Ontario Premier, Kathleen Wynne’s government is currently holding consultations on the design of an Ontario Retirement Pension Plan. What are some of the key features of that plan?
A: At the end of December of last year, the Ontario government introduced the first reading of the bill for the Ontario Retirement Pension Plan intended to commence at the beginning of 2017. The reason for the delay period is because there’s hope that the next federal government may agree enhance CPP, which could make the ORPP redundant.

But the key features are that it’s a mandatory plan. It’s like an adjunct to CPP. So, it would be mandatory in all Ontario workplaces, except where the employer already has a workplace pension plan for its workforce, and it would be integrated with the CPP.

Q: Several other provinces, like PEI, may jump on the same bandwagon, so why do we still need a national CPP enhancement?
A: Well, it would better if the federal government came on board to make it nationwide. I mean if we just have it province by province, then it’ll be more of a patchwork. This could influence inter-provincial mobility. We don’t want to discourage full inter-provincial mobility by Canadians.

Q: Well – and, of course, the other issue is – just like pension legislation across the country, which is similar, but actually very different when it comes to the details – we run the risk of getting ten or 11 completely different plans.
A: And that would result in over-regulation and an increase in transaction costs although the whole point of this is to minimize and optimize the costs of running the fund — which is why CPP is good model.

CPP is viewed as one of the best universal, mandatory state-sponsored pension plans in the world. It would be a shame for us to have to rely on province-by-province, patchwork participation in such a scheme.

Also, you know, at the end of the day, this is really something that benefits all Canadians, regardless of what age or generation they are in. One way or the other, taxpayers will be taking care of older Canadians who are poor. It’s better that Canadians have their own resources to take care of themselves; and that’s an optimal use of taxpayer resources.

So, I just really think it’s a good idea, and I really think that this is the ballot question for the upcoming federal election this year. We saw this 50 years ago when CPP was introduced. I believe this year there will be a renaissance of that issue.

Q: Thanks, Ari. It was great to talk to you.
A: My pleasure, Sheryl. Be well.

—–
This is an edited version of the podcast posted above which was recorded on February 3, 2014.

How much will I get from CPP?

By Sheryl Smolkin

A pension from the Canada Pension Plan (CPP) is an important foundation on which most Canadians will build their retirement income. Therefore it is important to understand how much you will be entitled to at retirement.[i]

The maximum monthly amount you can receive if you retire at age 65 in 2015 is $1,065. Service Canada reports that in October 2014 the average pension for new beneficiaries was $610.57. That’s because applicants only got a full pension if they contributed the maximum amount up to the Yearly Maximum Pensionable Earnings (YMPE) for at least 40 years between ages 18 and 65.

The YMPE in 2014 was $52,500 and it increased to $53,600 in 2015. Therefore this year the maximum CPP contribution for both employers and employees is $2,479.95. Self-employed people must remit up to $4,959.90. If you earn more than the YMPE you will notice a “salary bump” part way through the year once you have made maximum CPP (and Employment Insurance) contributions.

CPP offers protection against periods where you had reduced or zero earnings for general reasons (up to eight years) or child-rearing  by automatically dropping a number of months of your lowest earnings when calculating your CPP benefit. You can start collecting CPP at age 60 but your annual pension will be reduced by .58% per month prior to age 65 (rising to .6% per month in 2016). If you take an early CPP pension and go back to work, you must continue to pay into the plan until at least age 65. CPP contributions for working Canadians over age 65 are optional until age 70.

When you are already receiving a CPP pension, contributions between ages 60 and 70 increase your benefit by a lifetime Post-Retirement benefit (PRB). The maximum annual PRB you can earn in 2015 is $319.56 and it will be added to your benefit payments in the next year.

CPP uses a Statement of Contributions to keep a record of your pensionable earnings and your contributions to the Plan. The Statement of Contributions can assist you in your retirement planning.

Your statement shows your total CPP contributions for each year and the earnings on which your contributions are based. If you contributed the maximum there will be a letter “M” beside the year. In addition, it provides an estimate of what your pension or benefit would be if you and/or your family were eligible to receive it now.

You can view and print a copy of your Statement of Contributions online. You will need to request a Personal Access code that will be sent to you by mail.

You can also request a hard copy of your statement from:
Contributor Client Services
Canada Pension Plan
Service Canada
PO Box 9750 Postal Station T
Ottawa ON K1G 3Z4

Table 1: CPP Contributions and Benefits

CPP 2014 2015
CONTRIBUTION AND BENEFIT LEVELS
Year’s Maximum Pensionable Earnings $52,500.00 $53,600.00
Contribution Rate – Employee/Employer 4.95% 4.95%
Maximum Contribution – Employee/Employer $2,425.50 $2,479.95
Year’s Basic Exemption $3,500.00 $3,500.00
Pensionable Earnings* $49,000.00 $50,100.00
RETIREMENT BENEFIT MAXIMUM
Monthly pension on retirement during the year at age 65 $1,038.33 $1,065.00
OTHER BENEFIT MAXIMA
Monthly Survivor’s Benefit
Spouse age < 65 $567.91 $581.13
Spouse age = 65 $623.00 $639.00
CPP Flat Rate Component:
Survivor’s Benefit
$178.54 $181.75
Monthly Disability Benefit
Maximum $1,236.35 $1,264.59
Flat rate component $457.60 $465.84
Lump Sum Death Benefit $2,500.00 $2,500.00
Deceased/Disabled Contributor’s Child Benefit $230.72 $234.87
INDEXATION RATE 0.9% 1.8%

* This figure represents the Year’s Maximum Pensionable earnings minus the Year’s Basic Exemption.

Also read How to Calculate Your CPP Retirement Pension

[i] Disability benefits and survivor benefits are also payable from CPP. See Table above.

Jan 26: Best from the blogosphere

By Sheryl Smolkin

This week we picked up a series of interesting blogs from both bloggers who have previously appeared in this space and several who are new to us .

I was particularly interested in Four reasons you should still take CPP early from Jim Yih at Retire Happy. In his example comparing twins, one who takes CPP early and one who waits until age 65, he calculates the “break even age” as 74.4. Keeping in mind that the earlier years of retirement are when retirees spend the most, he thinks that money in hand now is better than money received later in life.

Eric Ravenscraft’s blog on Lifehacker suggests that you treat savings like a tax so you do it. In other words, have your savings taken off at source by your financial institution so you don’t get a chance to spend the money on something else first.

The Froogal Student’s guest blog Setting goals like the wealthy on the Canadian Budget Binder recommends that you set goals, plan ahead, have career goals and anticipate failure in an interview. While life is far too complex to predict, he says adversity hits everyone. The difference between success and failure lies in preparation.

What I Learned About Money from My Wife by Barry Choi on Money We Have is intended to make it easier for people in relationships to talk about money. For example, Barry likes to put every expense on a credit card to get the points. However he respects his wife’s decision to spend cash wherever possible because she says this approach helps her to control her spending.

Finally, on Our Big Fat Wallet, Dan discusses the pros and cons of prenuptial agreements. While anticipating a possible future divorce may take the shine off your sparkling new ring, the fact is the divorce rate in Canada is about 40%, so it doesn’t hurt to think about how you would deal with your financial affairs in advance if the marriage doesn’t last forever after.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

Another Look At Life Annuities (Part 2)

By Sheryl Smolkin

If you are considering purchasing a life annuity using funds in your registered (RRSP, RRIF, LIRA, RPP) or unregistered accounts (Savings Accounts, GIC, TFSA, etc) you will need to consider what features to select and how your decision will impact the level of benefits you receive.

For example, a life annuity may be:

  • A single life annuity based only on the age of one annuitant.
  • A joint and survivor annuity that pays a portion of the benefit (i.e. 60%) until the death of the surviving spouse.
  • A single or joint and survivor annuity that guarantees payments for a specific period (i.e. 10 years).
  • A deferred annuity that does not start paying monthly benefits in the same year the annuity is purchased.

Other more specialized annuities include term certain or fixed term annuities, guaranteed annuities with cash back features, impaired and child inheritance annuities. You can read about them here.

To give you an idea how the nature of an annuity can impact your monthly benefits, I got a series of quotes from the RetirementAdvisor.ca Standard Annuity Calculator on October 28, 2014 which I summarized in the table below. In all cases it is assumed that a lump sum of $100,000 was used to purchase an annuity and when invested by the insurance company, the lump sum earned 4%.

While these quotes assume the primary annuitant is female and the second annuitant is male, when a male and female of the same age purchase individual life annuities, the male will receive a slightly higher periodic payment than the female because the male’s life expectancy is shorter.

Table 1: Annuity Purchase quotes

Single life Joint Single Life, COLA Joint, COLA Single, 10 yr, COLA
Gender of primary annuitant F F F F F
Age purchased 65 65 65 65 65
Age payouts begin 65 65 65 65 65
Gender of joint annuitant M M
Age when annuity purchased 65 65
Cost of living increases (COLA) X X X
10 yr. guaranteed payments X
% Payable to 2nd annuitant when 1st dies 60% 60%
MONTHLY BENEFIT $637 $592 $522 $481 $503
Joint, 10 yr, COLA Single, 10 yr, COLA Age 71 start Joint, 10 yr, COLA Age 71 start Single, 10 yr, COLA Age 80 start Joint, 10 yr, COLA Age 80 start
Gender of primary annuitant F F F F F
Age purchased 65 65 65 65 65
Age payouts begin 65 71 71 80 80
Gender of joint annuitant M M M
Age when annuity purchased 65 65 65
Cost of living increases (COLA) X X X X X
10 yr. guaranteed payments X X X X X
% Payable to 2nd annuitant when 1st dies 60% 60% 60%
MONTHLY BENEFIT $473 $762 $719 $1,401 $1,355

Source: RetirementAdvisor.ca calculator as of October 28, 2014. Assumption: $100,000 lump sum purchase earns 4%.

It is apparent that the stripped down single life annuity pays a higher monthly amount ($637) than single or joint annuities with various combinations of guarantee periods and COLAs.

Benefit payments also increase significantly if the annuity payouts are deferred to age 71 ($762, single; $719, joint) even with a 10 year guarantee and COLAs. The payments are even higher payment if an annuity with the same features is deferred to age 80 ($1,401 single; $1,355 joint).

Furthermore, annuity payouts also vary as between insurance companies. For example, you can find current quotes from a series of insurance companies for single life annuities on a premium of $100,000 based on a guaranteed period of 5 years for both males and females on the Morningstar Canada website.

Receiving monthly annuity benefits in retirement can give you peace of mind. However, the monthly benefit you can purchase for any given lump sum varies considerable depending on the type of annuity you select, the age when you purchase the annuity, the age you begin collecting benefits and the interest rate assumptions.

Your financial advisor or an annuity broker can get quotes tailored to your situation that will help you to get the features you need for the best possible price.

You can also use your SPP balance to purchase a life annuity directly from the plan. For more information about SPP annuities, take a look at Understanding SPP annuities. Because you purchase the annuity directly from SPP, there are no commissions or referral fees and you can be sure you are getting competitive rates.

 

Another Look At Life Annuities (Part 1)

By Sheryl Smolkin

Receiving a regular paycheque makes it easy to budget. The amount that appears in your bank account every month is what you have available to spend on necessary and discretionary items.

But once you retire and have to figure out how to make your lump sum savings last for the rest of your life, budgeting isn’t as easy. How much can you afford to spend? What if your investments earn less than you expected when you set up a withdrawal plan?

One way to add financial certainty is to buy a life annuity with all or a part of your retirement savings. A life annuity is purchased from an insurance company for a lump sum amount and it guarantees that you will receive a set monthly amount for life (unless the annuity is indexed).

While payments from a basic life annuity typically end when you die, at an additional cost you can add provisions like a guarantee period (i.e. payments will be made for a minimum of 10 years even if you die) or a joint and survivor feature that will continue to pay out until the death of the last spouse.

Annuities are purchased from licensed life insurance agents representing insurance companies. Life insurance agents are compensated by commissions that are factored into the cost of the annuity.

Life annuities have got a bad rap in recent years because with lower interest rates they are more expensive to purchase. Also, many people do not like the idea that they lose control of their money and that upon the death of the last annuitant or the expiry of the guaranteed payment period, the principal will not revert to their estate.

However, the upside of an annuity purchase is that if you live beyond the age that it is assumed you will live to when the original annuity purchase is made, your return on investment could be much higher than if you invested the money yourself.

If you purchase an annuity with funds from a registered plan (i.e. SPP, RRSP, DC pension plan) you must begin receiving payments by the end of the year you turn 71. Because all of the money in your account has been tax-sheltered, the full amount you receive monthly will be taxed at your incremental rate.

In contrast, you can purchase an immediate or deferred annuity from a non-registered account. For example, at age 65 you could opt to manage a portion of your money for the next 15 years, but use a lump sum to purchase a life annuity beginning at age 80. Your monthly payments will be higher than if the annuity started at age 65. Furthermore, only a portion of the benefit representing investment earnings after the purchase will be taxed.

You can use the RetirementAdvisor.ca Standard Annuity Calculator (or other similar online calculators) to model either the size of the lump sum it will take to generate a specific monthly benefit or the amount of the monthly benefit a specific lump sum will generate.

Monthly benefits you receive from the Canada Pension Plan, Old Age Security or a defined benefit pension plan are in effect, life annuities. Depending on your expected expenses and the amount of savings you have available, you may decide you do not need additional annuity income.

In the conclusion to his 2013 book “Life Annuities: An Optimal Product for Retirement Income”[1], Moshe Milevsky, Associate Professor of Finance at York University’s Schulich School of Business notes the following:

“Behavioural evidence is growing that retirees (and seniors) who are receiving a life annuity income are happier and more content with their financial condition in retirement than those receiving equivalent levels of income from other (fully liquid) sources, such as dividends, interest, and systematic withdrawal plans. Indeed, with growing concerns about dementia and Alzheimer’s disease in an aging population, automating the retiree’s income stream at the highest possible level—which is partly what a pension life annuity is all about—will become exceedingly important and valuable.”

If you have rejected an annuity purchase in the past or if you have never seriously considered investing in a retirement annuity, it may be time to take another look.

You can also use your SPP balance to purchase a life annuity directly from the plan. For more information about SPP annuities, take a look at Understanding SPP annuities. Because you purchase the annuity directly from SPP, there are no commissions or referral fees and you can be sure you are getting competitive rates.

[1] This book can be downloaded in pdf and ebook format at no cost.

BOOK REVIEW: THE REAL RETIREMENT Why you could be better off than you think

By Sheryl Smolkin

7Aug-The+Real+Retirement

The Real Retirement by Morneau Shepell Chief Actuary Fred Vettese and Bill Morneau, Executive Chairman of Morneau Shepell was released and extensively reviewed by the media in 2013.

However, I decided to circle back to this book over a year later because it is much more optimistic than many of the personal finance books I have reviewed since January.

Most financial writers seem to be trying to guilt readers into forgoing consumption during their working lives in order to accumulate sufficient RRSP savings to generate 70% of pre-retirement income.

In contrast, Vettese and Morneau present well-reasoned arguments to illustrate that income replacement of 50% or even less post-retirement will result in a “neutral retirement income” (NRIT), i.e. similar patterns of consumption for retirees.

Initially, they note that there are three phases of retirement:

Phase 1: From retirement age to the mid or late 70s or even later if you are healthy you are most likely to travel to exotic locations and pursue expensive hobbies. Therefore your income requirements will be highest in this phase.

Phase 2: In the second phase of retirement you may have diminished physical or mental capabilities. If so, you will travel less and cut back on strenuous activities. Therefore you will spend less money.

Phase 3: In the last years of your life you may be more physically or mentally impaired. You may need to be in a nursing home, or if you are wealthy enough, in an upscale retirement home with nursing care.

As a result, planning to spend more in the first decade of retirement will not necessarily mean that you will run out of money before you run out of time.

I thought it was particularly interesting that when considering available resources that can generate retirement income for Canadians, unlike many other personal financial writers, the authors also factor in the value of “Pillar 4 assets” including real estate, business equity and non-registered savings.

They use the following population breakdown in their calculations:

Income Quartile Average total income (couple)
Quartile 1 $29,000
Quartile 2 $53,000
Quartile 3 $78,000
Quartile 4 $110,000
Quartile 5 $204,000

The bottom quartile is dropped out because it is assumed that government benefits such as CPP, OAS and the GIS will provide better than average income replacement.

For the most part, Quartile 5 is also excluded since a couple with an income of over $200,000 has typically saved in RRSPs and has other Pillar 4 assets that can augment retirement ravings.

Vettese presents an example of a couple in Quartile 3 with $78,000 in annual income at age 65 and assumes they saved 6.5% annually in an RRSP from age 30 until retirement, Once their RRSP balance is converted to a RRIF at age 65, including government benefits they will have an income after retirement of $48,600/year.

Although retirement income for this couple is just 62% of their pre-retirement income, they no longer make RRSP and CPP contributions; have EI deductions and other employment costs; and pay a mortgage or child-raising costs. Their income taxes are also much lower.

The net result is that they have $14,000 more in disposable income to spend post-retirement! Although each family’s financial situation differs, the authors conclude that an NRIT which equalizes consumption before and after retirement generally only requires about 50% of pre-retirement income.

A calculations using a couple in Quartile 4 ($116,000 before retirement) reveals that the NRIT is just 44%. Furthermore, they can achieve their NRIT with 35 years of RRSP contributions equal to 3.5% of household income. And in general the higher the income level, the lower the NRIT.

This book is an interesting read because it presents a different perspective on the perennial questions, “How much will I need in retirement?” and “How much do I have to save to accumulate the amount I will require?”

While Vettese and Morneau suggest the answers to these questions may be “less than you think,” it doesn’t mean you don’t have to save at all. And all of the scenarios assume you retire free of mortgage and other debt. They also presume a drop in employment expenses and taxes payable that may not apply in your situation.

But if you thought the only thing you have to look forward to is Freedom 75, reading this book will cheer you up. Retiring at age 65 may in fact be a perfectly reasonable objective and you might even be able to afford a nice annual vacation or two while you are still well enough to travel.

The Real Retirement can be purchased online from Chapters for $15.64.

Fred Vettese
Fred Vettese
Bill Morneau
Bill Morneau

July 28: Best from the blogosphere

By Sheryl Smolkin

185936832 blog

This week we highlight a series of posts of particular interest to readers who are retired and those who are contemplating retirement.

The big question everyone has when planning their retirement is “how much can I spend so I won’t run out of money.” Mark at MyOwnAdvisor considers various approaches like the rule of 20 and the rule 0f 25. But he concludes there are no hard and fast rules when it comes to determining your retirement number other than taking the first step and figuring out what you’ll likely spend in retirement.

In a short video, Globe and Mail personal finance columnist Rob Carrick interviews Bruce Sellery, author of The Moolala Guide to Rockin’ Your RRSP. Bruce says if you save 10% a year you will probably have enough to retire. To calculated how much you must save, multiply the annual amount you need by 20. So savings of $1 million will be required to pay yourself $50,000/year.

On Boomer & Echo, Marie Engen writes about how downsizing might not be the way to finance your retirement. Moving to a smaller, cheaper place can free up home equity for living expenses and reduce annual housing costs.  But moving is expensive and often a new place can cost more than the one you sold.

Escaping work may be the dream you are working towards, but if you get bored or your investments take a dive you may want to find full or part-time work. Tom Drake on CanadianFinance blog gives five hints for retirees looking for a job. He advises you not to say you are retired as it will give the impression that your best working days are behind you.

If when to start payment of your CPP pension isn’t confusing enough, the answer is further complicated if you are currently receiving a CPP survivors pension. Jim Yih on RetireHappy presents  an interesting case study on combined CPP benefits where compared to the other two choices age 65 is never the best time to start collecting CPP.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

CPP post-retirement benefits a good deal

By Sheryl Smolkin

SHUTTERSTOCK
SHUTTERSTOCK

If you decide to start collecting CPP at age 60 but have to continue paying into the plan because you go back to work, your additional post-retirement contributions can significantly increase the amount of monthly pension you receive even while you are still working.

Since 2012, CPP recipients over age 60 who earn employment income must still contribute to the plan until age 65 and may voluntarily make contributions between ages 65-70 if they are earning an income.

Between age 60 and 70 your contributions will generate additional CPP benefits called post-retirement benefits. You don’t need to apply for these additional benefits. They will automatically be added to your monthly cheque following each year after age 60 you contribute.

A sample calculation prepared by Government Benefits Consultant Doug Runchey who worked for 32 years with Human Resources and Skills Development Canada illustrates how post-retirement contributions can add up.

His example is based on a person who in 2014 at age 60 starts collecting a maximum CPP pension of $702 ($1,038 minus the early retirement reduction of 32.4 per cent).

However in January 2015, this individual decides to go back to work. He subsequently earns the maximum pensionable amount of $52,500 (2014 figures) for the next five years before he stops working completely. Using the 2014 maximum CPP contribution level, between ages 60 and 65 he will be required to contribute $2,425.50 each year to the plan (a total of $12,127.50).

Beginning in 2015 at age 61, his pension will be increased each year by an annual, cumulative post-retirement benefit that adds up to $1,350 by age 65.

As a result, his pension of $702 per month at age 60 will increase in yearly increments to $814 monthly at age 65. Therefore, he will receive approximately $2,490 in CPP post-retirement benefits between age 60 and 65. If he lives for another 20 years until age 85, the post-retirement benefit will put an additional $27,000 in his pocket.

“By accruing additional CPP post-retirement benefits of $1,350 per year between age 60 and 65, the person in this example will earn an 11.13 per cent return on the $12,127 in contributions he made for the period,” Runchey says.

He also says that the notional return on post-retirement CPP contributions by a taxpayer earning the CPP maximum pensionable amount each year who chooses to work and contribute to CPP until age 70 will be even higher.

However, Runchey notes that if this taxpayer was self-employed and required to pay both the annual employer and employee contributions ($4,850) from age 60 to 65, the total return on his five years of post-retirement contributions will be cut in half, to 5.56 per cent.

Post-retirement benefits earned in one year are added to benefits beginning in January of the following year, but eligible contributors may not receive the payment until April or May with a retroactive payment to the beginning of the year.

The amount of CPP post-retirement benefits that you can earn between ages 60 and 70 depends on your earnings and the number of years you continue to work and contribute. A Service Canada PRB Calculator will help you calculate how contributing after you begin receiving CPP benefits but before you stop working will increase your CPP benefits at retirement.

If you are over 65 and want to stop contributing to the CPP, you must complete the CPT30 form and give a copy to your employer. If you are self-employed, you must complete the appropriate section of the CRA CPP contributions on Self-Employment and Other Earnings and file it with your income tax return.

You can change your mind and begin contributing to the CPP again but you are allowed only one change per calendar year.

Also read:
Working and aged 60 or older
Canada Pension Plan Post-Retirement Benefit – Born in 1950
CPP Post Retirement Benefits – DR Pensions Consulting