Now and Tomorrow Excellence in Everything We Do Amendments to the Canada Pension Plan to be phased in from 2011 to 2016 Technical Presentation Last updated in May 2011 This document contains information on the Canada Pension Plan (CPP). In case of dispute, the wording and provisions of the Canada Pension Plan and Regulations prevail.
About this presentation The following presentation is intended to describe the changes which are currently being implemented to the Canada Pension Plan (CPP) at a technical level. This presentation is primarily directed at financial planners and other individuals well-versed in the current CPP provisions. This presentation is intended to demonstrate the impacts of these changes, and how they interact, in order to assist in making decisions about when to begin benefits in retirement. This presentation is separated in 3 main sections: Pages 3 to 17: General information about the C-51 Changes Pages 18 to 47: Example case studies Pages 48 to 59: CPP Retirement Benefit and Post-Retirement Benefit Calculations tables This presentation was created for information purposes only. Individuals should base their decisions on their personal situations. 2
Outline of presentation Modernizing the Plan to adapt to societal trends Four changes Choices depend on individual wants and needs Summary of effective dates Sources of additional information Examples of the new legislation s application Annex: Calculation tables and formulas 3
CPP is adapting to societal trends The CPP provides partial income replacement in the case of retirement, disability, and death. Canadians are living longer and healthier lives, and this is creating greater opportunities for employment later in life. Retirement is a process that often occurs in stages, rather than as a one-time event. Changes to the CPP will ensure that the Plan remains actuarially fair and financially sustainable and that it responds to the evolving needs of Canada s aging population and to changes in the economy and labour market. These amendments will be implemented gradually from 2011 to 2016. Changes to the Plan may affect how and when contributors choose to retire from work and when they decide to apply for a CPP retirement pension. 4
Summary of amendments to the CPP Amendment 1 Restore the adjustment factors to their actuarially fair levels for retirement pensions taken before and after age 65. Amendment 2 Allow CPP retirement pension recipients who work to make contributions to a new Post-Retirement Benefit.* Amendment 3 Eliminate the requirement to stop working or decrease earnings in order to qualify for a reduced CPP retirement pension. Amendment 4 Enhance the general drop-out provision to exclude up to an additional year of low earnings from the benefit calculation. * Those who receive a retirement pension from the Quebec Pension Plan and work in Canada outside Quebec will be required to pay CPP contributions. 5
Rebalancing the adjustment factors for early and late retirement pensions is required Amendment 1 Restore the adjustment factors to their actuarially fair levels for retirement pensions taken before and after age 65. Rationale: The adjustment factors ensure that the effect on the Plan is the same over time regardless of when individuals choose to begin their pension. Adjustment factors reflect length of time a person is expected to receive benefits (i.e. longer for early retirees / shorter for late retirees). Adjustment rate had been left unchanged since 1987, despite changes in life expectancy. 6
to restore actuarial fairness. 1987 Factors (Maximum): New Factors (Maximum at maturity): Age 60: reduced by 30% Age 60: reduced by 36% (2016) Age 70: increased by 30% Age 70: increased by 42% (2013) 7
Gradual changes with post-65 factors introduced faster Gradually increase pre-65 actuarial adjustment factors -0.5% per month -0.52% -0.54% -0.56% -0.58% -0.6% per month 2009 notice period 2012 2013 2014 2015 2016 Increase post-65 actuarial adjustment factors: +0.5% per month +0.57% +0.64% +0.7% per month 2009 notice period 2011 2012 2013 8
Working beneficiaries allowed to gain additional CPP retirement income Amendment 2 Allow CPP retirement pension recipients who work to make contributions to a new Post- Retirement Benefit. Rationale: Canadians are living longer and healthier lives and some are working later in life. Presently, working CPP beneficiaries between 60 and 65 cannot contribute to the CPP. The CPP is changing to better recognize that retirement is a process that often occurs in stages. Starting in 2012, for individuals who work while receiving their CPP retirement pension: Under age 65: contributions are mandatory for the pensioner and their employer. Between 65 and 70: contributions are optional. If an individual chooses to contribute, their employer will have to contribute. Contributions made while receiving the CPP retirement pension will build up only Post- Retirement Benefits. These contributions do not create eligibility or increase the amount of other CPP benefits (e.g. retirement, survivor, disability). These contributions are not subject to a credit split upon separation, divorce or the end of a common-law relationship. 9
with the new Post-Retirement Benefit! 10
Elimination of work cessation test Amendment 3 Eliminate the requirement to stop working or decrease earnings in order to qualify for a reduced CPP retirement pension. Rationale: Retirement now tends to be a process rather than a one-time event. Today, older workers may stop and restart working, reduce their hours of work, or change the nature of their work. Many want the flexibility to continue to work without interruption when they begin to receive their CPP retirement pension. The elimination of the work cessation test avoids disruptions in the income of workers and in the human resources of employers. It better reflects how Canadians choose to live, work and retire. 11
More years of low or zero earnings will be dropped from benefit calculation Amendment 4 Enhance the general drop-out provision to exclude up to an additional year of low earnings from the benefit calculation. Rationale: People move in and out of the labour force for a variety of reasons (e.g. school, layoffs, providing care, etc.). The CPP is changing to provide increased pension protection for low-earning years and time spent outside the workforce. The general drop-out provision will increase from the current 15% of low earnings to 16% in 2012 and 17% in 2014. This will likely increase the benefit amount, helping those with gaps in contributions for example, from involuntary periods out of the workforce. This will help mitigate the effects of a greater benefit reduction for those who start receiving their CPP retirement pension before age 65. It will also increase the average disability and survivor s pension. 12
Who is affected by the changes? Individuals WILL be affected by changes, if they are: An employee who contributes to the CPP; A self-employed person who contributes to the CPP; Between the ages of 60 and 70 and work while receiving a CPP retirement pension (or work in Canada outside of Quebec while receiving a QPP retirement pension). The changes also affect employers who contribute to the CPP on behalf of their employees. Individuals WILL NOT be affected by these changes if they started receiving a CPP retirement pension before December 31, 2010, and they remain out of the workforce. They may, however, be required to make contributions toward the new Post-Retirement Benefit if they return to work after December 31, 2011. 13
Considerations An individual under age 65 should consider the fact that once they receive the CPP retirement pension, they generally will not be eligible for the CPP disability benefit if they subsequently become disabled. The new adjustment factors will further increase the pension for those who start receiving it after age 65, and further reduce it for those who start receiving it before 65. In general, as a result of these changes, a contributor who applies for the CPP retirement pension at age 70 would receive approximately double the annual benefit they would have received had they applied for the CPP at age 60 (as of 2016), even if they do not continue to work after age 60. 14
Choices depend on an individual s wants and needs When deciding whether to apply for the CPP retirement pension prior to age 65, at age 65, or after age 65 (up to age 70), contributors should consider their personal life circumstances. Sources of income, current and future Employment status now and in the future Contributor s health History of employment and CPP contributions Whether CPP pension credits were split following a divorce, separation or the end of a common-law relationship Plans for retirement 15
Summary of effective dates Actuarial Adjustment Factors January 2011: Begin increasing post-65 adjustment factors January 2012: Begin increasing pre-65 adjustment factors Contributions from CPP retirement pension recipients toward the new Post-Retirement Benefit January 2012 (Benefit payable in 2013) Elimination of work cessation test for early receipt of CPP retirement pension January 2012 Enhancement of General Drop-out Provision January 2012 (16%) and January 2014 (17%) 16
Need more information? Useful links Service Canada Canada Pension Plan (hyperlink) (www.servicecanada.gc.ca/eng/isp/cpp/cpptoc.shtml) Annual Reports of the Canada Pension Plan (hyperlink) ( http://www.rhdcc-hrsdc.gc.ca/eng/oas-cpp/reports/index.shtml) Canada Pension Plan Actuarial Reports (hyperlink) (http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?detailid=499) Bill C-51, Economic Recovery Act (stimulus) (hyperlink) ( http://www2.parl.gc.ca/housepublications/publication.aspx? Docid=4115871&file=4) 17
Examples of the New Legislation s Application The following examples are not recommendations. Individuals should base their decisions on their personal situations. 18
Two financial parameters determine the optimal time to receive a CPP retirement pension The CPP provides a great deal of flexibility in choosing the time to take the retirement pension (ages 60 to 70). The amounts that individuals receive are affected by when they choose to take their pensions. Generally, individuals will consider one or both of these factors in choosing the time to begin receiving their CPP retirement pension: 1) the pension amount payable per month; and/or 2) the total retirement benefits collected from the Plan. Influencing these two parameters are: Age of individual and time of CPP retirement Health considerations and Labour market participation before and/or after receiving the pension The following case scenarios examine both parameters and their interaction. 19
Consideration: Tendency to underestimate lifespan as life expectancies increase With health care advancements and quality of life improvements over the last 40 years, people are living longer than was predicted at the time of their birth. Life expectancy increases during life time The average life expectancy of an individual who turned 60 in 2010 is projected to be an additional 27.2 years [age 87] for a woman, and 24.7 years [age 84] for a man. The average life expectancy of an individual who turned 65 in 2010 is projected to be an additional 22.6 years [age 87] for a woman, and 20.3 years [age 85] for a man. Years of life remaining at age 60 and 65 1966 1980 1990 2000 2010 2015 2025 2050 60 22.9 24.1 25.4 26.4 27.2 27.5 28.0 29.3 65 18.5 19.7 20.8 21.9 22.6 22.9 23.5 24.6 60 17.8 19.5 21.6 23.5 24.7 25.1 25.8 27.1 65 14.0 15.5 17.2 19.0 20.3 20.7 21.3 22.6 Note: Life Expectancy projections presented here are taken from the 25 th Actuarial Report on the CPP 20
Sample Case 1 Gradual transition to retirement with average career earnings Mr. Brown (born 1953) plans to gradually transition to retirement: he will switch to parttime work at age 63 and fully retire at 68, while continuously contributing to the CPP. Mr. Brown has a work history with few gaps and an employer-sponsored pension. In 2013, his expected unadjusted CPP retirement pension is about 90% of the maximum. Mr. Brown will continue to work full-time at (or above) the year s maximum pensionable earnings (YMPE), and part-time at 50% of YMPE ($24,150 in earnings, $1,022.18 in contributions) If he is healthy and has an average life expectancy (82), when is the optimal time to take his retirement pension? When to start CPP retirement pension to maximize pension payments? Begin receiving CPP retirement pension at 60, and; Continue contributing to the CPP while working part-time. Start CPP retirement pension at 63 or 65. Continue contributing to the CPP while working part-time. Continue contributing to the CPP while working part-time. Start CPP retirement pension at 68. 21
Sample Case 1: Scenario 1 Start CPP at 60, continue contributing while working Mr. Brown s work history is such that his unadjusted retirement pension will be $863.27, including 16% of the general drop-out. As he reaches 60 in 2013, the new actuarial reduction of 32.4% will apply (i.e., pension would be 67.6% of full pension at 65). Therefore, his actual pension at age 60 will be: $863.27 x 67.6%=$583.57 Suppose earnings from work after CPP retirement 2013 (60) 100% of YMPE 2016 (63) 100% of YMPE 2019 (66) 50% of YMPE 2014 (61) 100% of YMPE 2017 (64) 50% of YMPE 2020 (67) 50% of YMPE 2015 (62) 100% of YMPE 2018 (65) 50% of YMPE 2021 (68) 50% of YMPE The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. 2014 $17.55 2017 $22.27 2020 $14.02 2015 $18.99 2018 $12.00 2021 $15.02 2016 $20.54 2019 $13.01 2022 $16.03 The total monthly pension at age 69 is the sum of all PRBs and the early retirement benefit taken at 60 = $733.00. If life expectancy is 82 years, the total amount collected from the CPP will be $193,825. 22
Sample Case 1: Scenario 2 Start CPP at 63 when full-time work stops, continue part-time work By continuing to work and starting his pension later, Mr. Brown increases his lifetime average earnings. His unadjusted retirement pension will now be $892.53, including the 17% general drop-out. As he turns 63 in 2016, the new actuarial reduction of 14.4% will apply (i.e., pension is 85.6% of full pension at age 65). His actual pension at age 63 will be: $892.53 x 85.6%=$764.01 Earnings from work after CPP retirement 2016 (63) 100% of YMPE 2018 (65) 50% of YMPE 2020 (67) 50% of YMPE 2017 (64) 50% of YMPE 2019 (66) 50% of YMPE 2021 (68) 50% of YMPE The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. 2017 $22.27 2019 $13.01 2021 $15.02 2018 $12.00 2020 $14.02 2022 $16.03 The total monthly pension at age 69 is the sum of all PRBs and the early retirement pension taken at 63 = $856.36. If life expectancy is 82 years, the total amount collected from the CPP will be $201,773. 23
Sample Case 1: Scenario 3 Work full-time to 63, start CPP at 65, continue part-time work until 68 At age 65, (2018) Mr. Brown s unadjusted retirement pension will be $891.46. Note: This amount is almost identical to the one in Scenario 2. Years of lower or zero earnings at the end of a career may reduce a contributor s lifetime average, and thus, their unadjusted retirement amount. However, as he will start receiving his benefit at age 65, there is no actuarial adjustment. Therefore, his actual pension is also $891.46, which is higher than in Scenario 2. Suppose earnings from work : 2018 (65) 50% of YMPE 2020 (67) 50% of YMPE 2019 (66) 50% of YMPE 2021 (68) 50% of YMPE The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. 2019 $13.01 2021 $15.02 2020 $14.02 2022 $16.03 The total monthly pension at age 69 is the sum of all PRBs and the full retirement benefit taken at 65 = $949.54. If Mr. Brown lives to age 82, the total amount collected from the CPP will be $203,298. 24
Sample Case 1: Scenario 4 Work full-time to 63, work part-time until 68 (and start CPP then) At age 68, Mr. Brown s unadjusted CPP retirement pension will be $928.38. Note: This increase is the result of earnings substitution which allows someone who has not yet taken up their retirement pension and continues to work past the age of 65 to replace earnings gaps in their earlier work history (such as periods of unemployment) with months of earnings after age 65. In 2021 the new adjustment factor for starting the pension at age 68 is 125.2%. Thus, Mr. Brown s actual retirement pension will be: $928.38 x 125.2%=$1,162.33 If a contributor postpones his or her CPP retirement pension until after age 65 (up to age 70), there will likely be a significant increase in the retirement pension. If Mr. Brown lives to age 82, the total amount collected from the CPP will be $209,219. 25
Sample Case 1: Summary 1) Start CPP at 60 Continue working full-time until 63 and then parttime, contributing until 68 2) Stop working full-time at 63 and begin CPP then, and continue parttime work, contributing until 68 3) Stop working full-time at 63, continue part-time work, contributing until 68, and start CPP at 65 4) Stop working full-time at 63, continue parttime, contributing until 68, and start CPP at 68 CPP at time of receipt CPP (with PRBs) at age 69 Total amount collected from the CPP by age 82 $583.57 $764.01 $891.46 $1,162.33 $733.00 $856.36 $949.54 $1,162.33 $193,852 $201,773 $203,298 $209,219 In this example, Scenario 2 and Scenario 3 produce similar results in terms of the total amount collected from the Plan. However, the monthly benefit will be higher if the retirement pension is taken at age 65 (Scenario 3) rather than 63 (Scenario 2). If an individual with a continuous work history has average or above average life expectancy, postponing receipt of the pension until age 68 will likely produce superior results for both the total amount collected from the Plan and the monthly benefit. 26
Sample Case 2 Interrupted career earnings and small expected pension Ms. Smith reaches 65 in 2017 and plans to supplement her pension by working part-time at 10% of the average wage Annual earnings of $4,830 and contributions of $65.84, in 2011 dollars. Ms. Smith spent 10 years outside the workforce to care for her young children. In addition to this, she has an interrupted employment history and her expected unadjusted CPP retirement pension is 35% of the maximum. She is healthy and has an average life expectancy (85). When to start CPP retirement pension to maximize pension payments? Start CPP retirement pension at 64 or 65, continue working and contributing to CPP until 70 Start CPP retirement pension at 65 with no further contributions. Continue working parttime until 70 and start CPP retirement pension at 70. 27
Sample Case 2: Scenario 1 Start CPP at age 64, continue contributing until 70 Based on her work history, Ms. Smith s unadjusted retirement pension will be $332.79, taking into account the new 17% general drop-out. As she reaches 64 in 2016, the new actuarial reduction of 7.2% will apply (pension is 92.8%). Her actual pension at age 64 will be: $332.79 x 92.8%=$308.83 Earnings from work: 2016 (64) 10% of YMPE 2018 (66) 10% of YMPE 2020 (68) 10% of YMPE 2017 (65) 10% of YMPE 2019 (67) 10% of YMPE 2021 (69) 10% of YMPE The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. 2017 $2.40 2019 $2.80 2021 $3.21 2018 $2.60 2020 $3.00 2022 $3.41 The total monthly benefit amount at age 71 is the sum of all Ms. Smith s PRBs and her CPP retirement pension (taken at age 64) = $326.25. If Ms. Smith lives to age 85, she will collect a total amount of $85,355 from the CPP. 28
Sample Case 2: Scenario 2 Start CPP at 65, continue contributing until age 70 Based on her work history (and additional year of work), Ms. Smith s unadjusted retirement pension will be $326.92. In 2017, the new 17% general drop-out will apply. As she retires at 65, there will be no upward or downward adjustment to her CPP retirement pension. Her actual pension amount will be $326.92. Earnings from work: 2017 (65) 10% of YMPE 2019 (67) 10% of YMPE 2021 (69) 10% of YMPE 2018 (66) 10% of YMPE 2020 (68) 10% of YMPE The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. 2018 $2.60 2020 $3.00 2022 $3.41 2019 $2.80 2021 $3.21 The total monthly pension at age 71 is the sum of all PRBs and the CPP retirement pension (taken at age 65) = $341.94. If Ms. Smith lives to age 85, she will collect a total amount of $85,604 from the CPP. 29
Sample Case 2: Scenarios 3 and 4 Scenario 3. Start CPP retirement pension at 65 with no further contributions Based on her work history, Ms. Smith s unadjusted retirement pension will be $326.92. In 2017 the new general drop-out of 17% will apply. As she takes her pension at age 65, it will not be adjusted upward or downward. Her actual pension amount will be $326.92. If she ceases contributing to the CPP, no additional benefits are earned. If she lives to age 85, the total collected from CPP will be $82,383. Scenario 4. Continue contributing until 70 and start retirement pension at 70 Based on her additional years of contributions, Ms. Smith s unadjusted retirement pension will now be $342.55. As she takes the pension at age 70 in 2022, the new general drop-out of 17% and the new actuarial adjustment of 42% will apply. Her actual CPP retirement pension will be: $342.55 x 142%=$486.42 If she lives to age 85, she will collect a total amount of $93,392 from the CPP. 30
Sample Case 2: Summary 1) Start CPP at 64 and continue contributing until 70 2) Start CPP at 65 and continue contributing until 70 3) Start CPP at 65 with no further contributions 4) Continue contributions until 70 and start CPP at 70 CPP benefit at time of receipt CPP benefit (with PRBs) at age 70 Total collected from the CPP by age 86 $308.83 $326.92 $326.92 $486.42 $326.25 $341.94 $326.92 $486.42 $85,355 $85,604 $82,383 $93,392 If a contributor has an inconsistent employment history and is able and willing to work and continue contributing to the CPP, postponing receipt of the CPP retirement pension will increase the benefit amounts received (given average or above-average lifespan). Delaying taking the retirement pension by one year (65 vs. 64) results in a small increase in benefits (Scenarios 1 and 2). The largest monthly benefits and total amounts collected over a lifetime can be obtained by continuing to contribute and getting the maximum actuarial adjustment by taking the CPP retirement pension at age 70 (Scenario 4). Continuing to contribute to the CPP after collecting the retirement pension will increase the amount of benefits through the PRB; however, due to the actuarial adjustments, greater total benefit amounts may be received by postponing taking the retirement pension until after age 65. 31
Sample Case 3 Poor health and below average life expectancy Mr. Scott reaches 60 in 2012. He was recently laid off and is in poor health. As a result, he now works part-time, earning 10% of the average annual wage (annual earnings $4,830; contributions $65.84). Earlier in his career, Mr. Scott had a few work interruptions and his income was below average. His expected unadjusted pension is 50% of the maximum retirement pension. He has less than an average life expectancy (age 69). When to start CPP retirement pension to maximize pension payments? Begin receiving CPP retirement pension at 60 or 61. Start CPP retirement pension at 65. Start CPP retirement pension at 60. Work part-time and continue contributing to the CPP until age 64. 32
Sample Case 3: Scenario 1 and 2 Scenario 1: Begin receiving CPP retirement pension at 60 with no further contributions Based on his work history, Mr. Scott s unadjusted retirement pension will be $480.00, including a new general drop-out of 16%. As he reaches 60 in 2012, the new actuarial reduction of 31.2% will apply. His actual pension at age 60 will therefore be: $480.00 x 68.8%=$330.24 If he lives to age 69, the total amount he will collect from the CPP will be $35,665. Scenario 2: Work part time until age 61, begin receiving CPP retirement pension at 61 with no further contributions. Mr. Scott works one additional year at a lower wage; his unadjusted retirement pension will be $471.50, including the new general drop-out of 16%. As he reaches 61 in 2013, the new actuarial reduction of 25.92% will apply. His actual pension at age 61 will therefore be: $471.50 x 74.08%=$349.28 If he lives to age 69, the total amount he will collect from the CPP will be $33,531. 33
Sample Case 3: Scenario 3 Scenario 3: Keep working part-time until age 64, begin receiving CPP retirement pension at 65 with no further contributions. In 2017, a general drop-out of 17% will apply. In this case, the unadjusted retirement pension is $443.95. As Mr. Scott starts the retirement pension at 65, his pension will not be adjusted upward or downward. If he lives to age 69, the total he will collect from the CPP will be $21,309. 34
Sample Case 3: Scenario 4 Scenario 4: Start retirement pension at 60 and continue contributing until 64. Actual CPP retirement pension at age 60 will be $330.24 as in Scenario 1. Earnings from work: 2012 (60) 10% of YMPE 2014 (62) 10% of YMPE 2013 (61) 10% of YMPE 2015 (63) 10% of YMPE The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the contributor s age. 2013 $1.78 2015 $2.07 2014 $1.92 2016 $2.23 Retirement benefit with PRBs at age 65 = $338.24 If Mr. Scott lives to age 69, he will collect a total amount of $36,280 from the CPP. 35
Sample Case 3: Summary 1) Start CPP at 60 and no further contributions 2) Start CPP at 61 and no further contributions 3) Start CPP at 65 and no further contributions 4) Start CPP at 60 and continue contributing (until 64) CPP benefit at time of receipt CPP benefit (with any PRBs) at age 65: Total collected from CPP by age 69 $330.24 $349.28 $443.95 $330.24 $330.24 $349.28 $443.95 $338.24 $35,665 $33,531 $21,309 $36,280 If a contributor has poor health and a short life expectancy, the total amount they collect from the CPP may be higher if they begin receiving the retirement pension as early as possible. Any delay in taking the pension will increase the monthly amount but may decrease the total amount collected, as the contributor would receive the payments for a limited period of time (Scenario 1 compared to 2 and 3). Working part-time and making CPP contributions toward the new PRB after starting the CPP retirement pension can result in small increases in CPP payments. (Scenario 4). 36
Sample Case 4 Retiring before or after introduction of the new adjustment factors Ms. Seguin has reached age 60 in 2011. New adjustment factors will be introduced in 2012. Should she start her retirement pension before the changes occur? Ms. Seguin s predicted unadjusted retirement pension is 60% of the maximum. Ms. Seguin spent 8 years outside the workforce to care for her young children. She is currently employed full-time at 70% of the average industrial wage and plans to continue working until age 68 or 70, shifting to part-time at age 67. 70% of YMPE reflects earnings of $33,810 and contributions of $1,500.35 20% of YMPE reflects earnings of $9,660 and contributions of $304.92 She is healthy and has an average life expectancy (85). When to start CPP retirement pension to maximize pension payments? Begin receiving CPP retirement pension at 60 or 64 Continue working and contributing until 70. Start CPP retirement pension at 65 and Stop contributing, OR Continue working and contributing until 70. Continue working and contributing until 68. Start CPP retirement pension at 68 with no further contributions. 37
Sample Case 4: Scenario 1 Start CPP at 60, continue contributing until 70 Based on her work history, Ms. Seguin s unadjusted retirement pension will be $576.00. As she reaches 60 in 2011, the traditional general drop-out of 15% and the existing reduction factor will apply (i.e. 70% of a full pension). Her actual pension at age 60 will be: $576.00 x 70%=$403.20 Earnings from continuing work (no CPP contributions allowed until 2012): 2011 (60) 70% of YMPE 2014 (63) 70% YMPE 2017 (66) 70% YMPE 2020 (69) 20% YMPE 2012 (61) 70% YMPE 2015 (64) 70% YMPE 2018 (67) 20% YMPE 2021 (70) $0 2013 (62) 70% YMPE 2016 (65) 70% YMPE 2019 (68) 20% YMPE The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. 2011 (60) $0 2014 (63) $14.54 2017 (66) $18.21 2020 (69) $6.41 2012 (61) $0 2015 (64) $15.63 2018 (67) $19.62 2021 (70) $6.82 2013 (62) $13.53 2016 (65) $16.80 2019 (68) $6.01 The total monthly pension at age 70 is the sum of all PRBs and the early retirement pension taken at 60 = $520.77. If Ms. Seguin lives to age 85, the total collected from CPP will be $154,827. 38
Sample Case 4: Scenario 2 Start CPP at 64, continue contributing until 70 Continuing to work will increase Ms. Seguin s unadjusted retirement pension to $613.01. As she reaches 64 in 2015, the new drop-out of 17% and the new actuarial reduction of 6.96% will apply (pension is 93.04%). Her actual pension at age 64 will be: $613.01 x 93.04%=$570.35 Suppose earnings from work 2015 (64) 70% of YMPE 2018 (67) 20% YMPE 2016 (65) 70% of YMPE 2019 (68) 20% YMPE 2017 (66) 70% of YMPE 2020 (69) 20% YMPE The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. 2016 (65) $16.80 2019 (68) $6.01 2017 (66) $18.21 2020 (69) $6.41 2018 (67) $19.62 2021 (70) $6.82 The total monthly pension at age 70 is the sum of all PRBs and the early retirement benefit taken at 64 = $644.21. If Ms. Seguin lives to age 85, the total collected from CPP will be $167,564. 39
Sample Case 4: Scenario 3 Start CPP at 65, continue contributing until 70 Continuing to work will increase Ms. Seguin s unadjusted retirement pension to $618.05. In 2016, the new 17% drop-out will apply. As she retires at 65, her pension will not be adjusted for age. Suppose earnings from work 2016 (65) 70% of YMPE 2019 (68) 20% YMPE 2017 (66) 70% of YMPE 2020 (69) 20% YMPE 2018 (67) 20% YMPE The monthly PRB is a separate benefit. Each year of contributions results in a new PRB, payable the following year and actuarially adjusted for the age of the contributor. 2017 (66) $18.21 2020 (69) $6.41 2018 (67) $19.62 2021 (70) $6.82 2019 (68) $6.01 The total monthly pension at age 70 is the sum of all PRBs and the CPP retirement benefit taken at 65 = $675.13. If life expectancy is 85 years, the total collected from CPP will be $168,509. 40
Sample Case 4: Scenarios 4 and 5 Scenario 4. Start retirement benefit at 65 with no further contributions. Her actual retirement benefit at age 65 will be $618.05 as in Scenario 3. If Ms. Seguin lives to age 85, the total collected from CPP will be $155,749. Scenario 5. Continue contributing until 68 and start retirement benefit at 68. If she continues to work, her unadjusted retirement pension will now be $665.51. As she reaches 68 in 2019, the new general drop-out of 17% and the new actuarial increase of 25.2% will apply (i.e. 125.2% of a full pension). Her actual pension at age 68 will be: $665.51 x 125.2%=$833.21 If Ms. Seguin lives to age 85, the total collected from CPP will be $179,973. 41
Sample Case 4: Summary Start CPP at 60 (old actuarial factors) and continue contributing until 70. Start CPP at 64 (new actuarial factors) and continue contributing until 70. Start CPP at 65 and continue contributing until 70. Start CPP at 65 without further contributions. Continue contributing until 68 and start CPP at 68. CPP benefit at time of receipt Maximum CPP (adding all PRBs) Total collected from the CPP by age 85 $403.20 $570.35 $618.05 $618.05 $833.21 $520.77 $644.21 $675.13 $618.05 $833.21 $154,827 $167,564 $168,509 $155,749 $179,973 Contributors should make retirement decisions based on their personal life circumstances, not simply on the implementation schedule of the new actuarial factors. If a contributor is healthy and able to work, the new PRB will increase retirement income. However, postponing receipt of the CPP retirement pension, especially after age 65, will produce a larger monthly retirement pension and may increase the total amount collected from the Plan. 42
Sample Case 5: Ceasing contributing, but postponing receipt of retirement pension (different life expectancies) Mr. Mazur will reach 60 in 2016. New adjustment factors will be fully introduced. Mr. Mazur had some career interruptions and in 2016 his predicted unadjusted retirement pension will be 75% of the maximum. He is planning to permanently stop working at age 60. Assuming his life expectancy is average (85), below average (76) or above average (93) When to start CPP retirement pension to maximize pension payments? Take CPP retirement pension at age 60 Take CPP retirement pension at age 62 or 65 Take CPP retirement pension at age 70 43
Scenario 1 Sample Case 5 Stop work at 60, start CPP at 60 or 62 Based on his work history, Mr. Mazur s unadjusted retirement pension at age 60 will be $720.00. As he will reach 60 in 2016, the general drop-out is 17% and the new reduction factor applies (64.0% of a full pension). His actual pension at 60 will be: $720.00 x 64.0%=$460.80 If he lives to age 76, the total collected from the CPP will be $94,003. If he lives to age 85, the total collected from the CPP will be $143,769. If he lives to age 93, the total collected from the CPP will be $188,006. Scenario 2 If he stops working at 60, but postpones starting the CPP retirement pension until 62, the unadjusted retirement pension would be $687.27 (years of zero earnings at the end of contributory period reduce the pension). As he will reach 62 in 2018, the new drop-out of 17% and the new reduction factor will apply (i.e. 78.4% of a full pension). His actual pension at age 62 will be: $687.27 x 78.4%=$538.82 If he lives to age 76, the total collected from the CPP will be $96,987. If he lives to age 85, the total collected from the CPP will be $155,180. If he lives to age 93, the total collected from the CPP will be $206,907. 44
Scenario 3 Sample Case 5 Stop work at 60, take up CPP at 65 or 70 If Mr. Mazur stops working at age 60, but postpones starting the CPP retirement pension until 65, his unadjusted retirement pension at age 65 will be $643.40 (years of zero earnings at the end of contributory period reduce the pension). As he will reach age 65 in 2021, the general drop-out is 17%. Since he starts the pension at 65, there is no adjustment up or down. His actual pension at age 65 will be: $643.40 x 100%=$643.40 If he lives to age 76, the total collected from the CPP will be $92,650. If he lives to age 85, the total collected from the CPP will be $162,137. If he lives to age 93, the total collected from the CPP will be $223,904. Scenario 4 If he stops working at 60, but postpones taking the CPP retirement pension until age 70, the unadjusted retirement pension will be $643.40. As he will reach 70 in 2026, the general dropout is 17% and the new actuarial increase will apply (i.e. 142% of a full pension). His actual pension at age 70 will be: $643.40 x 142%=$913.63 If he lives to age 76, the total collected from the CPP will be $76,745. If he lives to age 85, the total collected from the CPP will be $175,417. If he lives to age 93, the total collected from the CPP will be $263,126. 45
Sample Case 5: Summary Client stopped working at age 60 CPP benefit at time of receipt Total collected from the CPP by age 76 (below average life expectancy) Total collected from the CPP by age 85 (average life expectancy) Start CPP at 60 Start CPP at 62 Start CPP at 65 Start CPP at 70 $460.80 $538.82 $643.40 $913.63 $94,003 $96,987 $92,650 $76,745 $143,769 $155,180 $162,137 $175,417 Total collected from the CPP by age 93 (above average life expectancy) $188,006 $206,907 $223,904 $263,126 A contributor who postpones applying for the CPP retirement pension until age 70 will receive approximately double the monthly benefit they would have received had they started the pension at age 60 (as of 2016), if they do not continue to work after age 60. (First row) However, if the contributor s lifespan is below average, the maximum pension (age 70) would not lead to the highest total amount collected from the CPP. (Second row) If the contributor has an average or above average lifespan, the bigger pension taken at age 70 would lead to a higher total amount collected from the Plan. (Third and fourth rows) Taking the pension at age 60 in the majority of cases would lead to the minimum total amount collected from the Plan. 46
Methodology The preceding examples provide comparisons of pension benefits valued in constant 2011 dollars. The calculations are based on fixing the Year s Maximum Pensionable Earnings (YMPE) and maximum retirement pension to their 2011 values. YMPE (2011) is $48,300 and the maximum monthly unadjusted retirement pension is $960.00 The maximum annual contribution for employees in 2011 is $2,217.60 The comparison of the net present value (NPV) of future benefits is not provided, as: The YMPE is indexed annually according to average wage growth. The future YMPE and the maximum CPP retirement pension in the year the pension starts would be taken into consideration while calculating an individual s pension; therefore, the actual pensions will be of higher dollar value than indicated in the examples provided here. Therefore, constant 2011 dollars are a good proxy of the NPV of future benefits. 47
Annex Calculation Tables 48
Calculating CPP Retirement Pension In 2011, contributions are paid on earnings between $3,500, the Year s Basic Exemption (YBE), and $48,300, the Year s Maximum Pensionable Earnings (YMPE). Assuming a contributor, aged 65, began contributing to the CPP at its inception in 1966 and is retiring sometime in 2010. Step 1 Determine average YMPE over last five years, including year of retirement. Add the YMPE for the year 2011 and each YMPE for the four previous years, then divide by five: $48,300 + $47,200 + $46,300 + $44,900 + $43,700 = $230,400 $230,400 / 5 = $46,080 The five-year average of the YMPE is called MPEA (Maximum Pensionable Earnings Average) and for the year 2011 is $46,080. Step 2 Convert the earnings for each year since 1966 into 2010 dollars. Suppose the person had earnings of $5,200 in 1978. The YMPE in that year was $10,400. To convert the earnings to 2010 dollars, you look at the relationship of the amounts: $5,200 is to $10,400 As X is to MPEA (that is $46,080) So $5,200 in 1978 dollars is the same as $23,040 in 2011 dollars. Repeat this calculation for each year in the contributory period in which contributions were made from 1966 to 2011. 49
Calculating CPP Retirement Pension (cont.) Step 3 Once all the earnings are in 2011 dollars, identify and eliminate from the calculation of the pension the 15 percent of the years with low or no earnings (e.g. due to periods of education, unemployment, etc.). In this example, approximately 7 of the 45 years in the contributory period are eliminated. Step 4 Add the earnings (in 2011 dollars) for each of the remaining 38 years, and divide the total by 38. The result is the yearly average pensionable earnings in 2011 dollars. Step 5 Multiply the yearly average pensionable earnings by 0.25 (the CPP pension replaces up to 25 percent of the average industrial wage). For the monthly pension payment, divide the product by 12. If the contributor s average pensionable earnings were $37,600, the contributor s monthly pension would be calculated as follows: $37,600 X 0.25 = $9,400 per year $9,400 / 12 = $783.33 per month. 50
Calculating new Post-Retirement Benefit (PRB) The new benefit maximum amount is equal to 1/40 th of the maximum CPP retirement pension for the year in pay. Thus, someone with earnings of half of YMPE would receive a PRB of one half of 1/40 th of maximum pension. Each year s PRB is considered its own new benefit, and is subject to the actuarial adjustment based on the recipient s age on January 1 of the year following the year in which contributions were made. The formula for calculating a (monthly) PRB based on earnings in 2012 is: [PE(2012)/YMPE(2012)] x 1/40 x 25% x MPEA(2013) x AAF(1-Jan-2013) /12, where: PE = Pensionable Earnings YMPE = Year s Maximum Pensionable Earnings MPEA = Maximum Pensionable Earnings Average (25% of this amount is maximum pension for the year) AAF = Actuarial Adjustment factor at age on 1 January 2013. 51
PRB Calculation Example Consider the case of Mr. Lee, who took up his retirement pension at age 60 in 2007, and had $50,000 of earnings in 2012. The formula for calculating Mr. Lee s new monthly (2013) PRB is as follows: [(A/B) C D E] / 12 = $28.02/month Where: A= Pensionable Earnings (2012) = $49,600 (Can t exceed YMPE) B=YMPE (2012) = $49,600 (Projection from 24 th Actuarial Report on the CPP) C= 0.00625 (1/40 x 25%) D= MPEA (2013) = $48,380 (Projection from 24 th Actuarial Report on the CPP) E= Actuarial Adjustment Factor = 1.112 Mr. Lee is 66.25 on 1 January 2013, subject to 16 months of adjustment 16 x 0.007 = 0.112 1 + 0.112 = 1.112 Adding those values to the formula: [($49,600/$49,600) x 0.00625 x $48,380 x 1.112]/12 = $28.02/month 52
Pension calculation table for 2010 (adjustment factors: -0.5% per month before 65, +0.5% per month after 65) AGE 60 61 62 63 64 65 66 67 68 69 70 70% 76% 82% 88% 94% 100% 106% 112% 118% 124% 130% 70.50% 76.50% 82.50% 88.50% 94.50% 100.50% 106.50% 112.50% 118.50% 124.50% 71% 77% 83% 89% 95% 101% 107% 113% 119% 125% 71.50% 77.50% 83.50% 89.50% 95.50% 101.50% 107.50% 113.50% 119.50% 125.50% 72% 78% 84% 90% 96% 102% 108% 114% 120% 126% 72.50% 78.50% 84.50% 90.50% 96.50% 102.50% 108.50% 114.50% 120.50% 126.50% 73% 79% 85% 91% 97% 103% 109% 115% 121% 127% 73.50% 79.50% 85.50% 91.50% 97.50% 103.50% 109.50% 115.50% 121.50% 127.50% 74% 80% 86% 92% 98% 104% 110% 116% 122% 128% 74.50% 80.50% 86.50% 92.50% 98.50% 104.50% 110.50% 116.50% 122.50% 128.50% 75% 81% 87% 93% 99% 105% 111% 117% 123% 129% 75.50% 81.50% 87.50% 93.50% 99.50% 105.50% 111.50% 117.50% 123.50% 129.50% Multiplier for the pension amount for each month between 60 and 70 th birthdays 53
Pension calculation table for 2011 (adjustment factors : -0.5% per month before 65 [notice period], +0.57% per month after 65) AGE 60 61 62 63 64 65 66 67 68 69 70 70% 76% 82% 88% 94% 100% 106.84% 113.68% 120.52% 127.36% 134.20% 70.50% 76.50% 82.50% 88.50% 94.50% 100.57% 107.41% 114.25% 121.09% 127.93% 71% 77% 83% 89% 95% 101.14% 107.98% 114.82% 121.66% 128.50% 71.50% 77.50% 83.50% 89.50% 95.50% 101.71% 108.55% 115.39% 122.23% 129.07% 72% 78% 84% 90% 96% 102.28% 109.12% 115.96% 122.80% 129.64% 72.50% 78.50% 84.50% 90.50% 96.50% 102.85% 109.69% 116.53% 123.37% 130.21% 73% 79% 85% 91% 97% 103.42% 110.26% 117.10% 123.94% 130.78% 73.50% 79.50% 85.50% 91.50% 97.50% 103.99% 110.83% 117.67% 124.51% 131.35% 74% 80% 86% 92% 98% 104.56% 111.40% 118.24% 125.08% 131.92% 74.50% 80.50% 86.50% 92.50% 98.50% 105.13% 111.97% 118.81% 125.65% 132.49% 75% 81% 87% 93% 99% 105.70% 112.54% 119.38% 126.22% 133.06% 75.50% 81.50% 87.50% 93.50% 99.50% 106.27% 113.11% 119.95% 126.79% 133.63% Multiplier for the pension amount for each month between 60 and 70 th birthdays 54
Pension calculation table for 2012 (adjustment factors: -0.52% per month before 65, +0.64% per month after 65) AGE 60 61 62 63 64 65 66 67 68 69 70 68.80% 75.04% 81.28% 87.52% 93.76% 100% 107.68% 115.36% 123.04% 130.72% 138.40% 69.32% 75.56% 81.80% 88.04% 94.28% 100.64% 108.32% 116.00% 123.68% 131.36% 69.84% 76.08% 82.32% 88.56% 94.80% 101.28% 108.96% 116.64% 124.32% 132.00% 70.36% 76.60% 82.84% 89.08% 95.32% 101.92% 109.60% 117.28% 124.96% 132.64% 70.88% 77.12% 83.36% 89.60% 95.84% 102.56% 110.24% 117.92% 125.60% 133.28% 71.40% 77.64% 83.88% 90.12% 96.36% 103.20% 110.88% 118.56% 126.24% 133.92% 71.92% 78.16% 84.40% 90.64% 96.88% 103.84% 111.52% 119.20% 126.88% 134.56% 72.44% 78.68% 84.92% 91.16% 97.40% 104.48% 112.16% 119.84% 127.52% 135.20% 72.96% 79.20% 85.44% 91.68% 97.92% 105.12% 112.80% 120.48% 128.16% 135.84% 73.48% 79.72% 85.96% 92.20% 98.44% 105.76% 113.44% 121.12% 128.80% 136.48% 74.00% 80.24% 86.48% 92.72% 98.96% 106.40% 114.08% 121.76% 129.44% 137.12% 74.52% 80.76% 87.00% 93.24% 99.48% 107.04% 114.72% 122.40% 130.08% 137.76% Multiplier for the pension amount for each month between 60 and 70 th birthdays 55
Pension calculation table for 2013 (adjustment factors: -0.54% per month before 65, +0.7% per month after 65) AGE 60 61 62 63 64 65 66 67 68 69 70 67.6% 74.08% 80.56% 87.04% 93.52% 100% 108.4% 116.8% 125.2% 133.6% 142% 68.14% 74.62% 81.1% 87.58% 94.06% 100.7% 109.1% 117.5% 125.9% 134.3% 68.68% 75.16% 81.64% 88.12% 94.60% 101.4% 109.8% 118.2% 126.6% 135% 69.22% 75.7% 82.18% 88.66% 95.14% 102.1% 110.5% 118.9% 127.3% 135.7% 69.76% 76.24% 82.72% 89.2% 95.68% 102.8% 111.2% 119.6% 128% 136.4% 70.3% 76.78% 83.26% 89.74% 96.22% 103.5% 111.9% 120.3% 128.7% 137.1% 70.84% 77.32% 83.8% 90.28% 96.76% 104.2% 112.6% 121% 129.4% 137.8% 71.38% 77.86% 84.34% 90.82% 97.3% 104.9% 113.3% 121.7% 130.1% 138.5% 71.92% 78.4% 84.88% 91.36% 97.84% 105.6% 114% 122.4% 130.8% 139.2% 72.46% 78.94% 85.42% 91.9% 98.38% 106.3% 114.7% 123.1% 131.5% 139.9% 73% 79.48% 85.96% 92.44% 98.92% 107% 115.4% 123.8% 132.2% 140.6% 73.54% 80.02% 86.50% 92.98% 99.46% 107.7% 116.1% 124.5% 132.9% 141.3% Multiplier for the pension amount for each month between 60 and 70 th birthdays 56
Pension calculation table for 2014 (adjustment factors: -0.56% per month before 65, +0.7% per month after 65) AGE 60 61 62 63 64 65 66 67 68 69 70 66.40% 73.12% 79.84% 86.56% 93.28% 100% 108.4% 116.8% 125.2% 133.6% 142% 66.96% 73.68% 80.40% 87.12% 93.84% 100.7% 109.1% 117.5% 125.9% 134.3% 67.52% 74.24% 80.96% 87.68% 94.40% 101.4% 109.8% 118.2% 126.6% 135% 68.08% 74.80% 81.52% 88.24% 94.96% 102.1% 110.5% 118.9% 127.3% 135.7% 68.64% 75.36% 82.08% 88.80% 95.52% 102.8% 111.2% 119.6% 128% 136.4% 69.20% 75.92% 82.64% 89.36% 96.08% 103.5% 111.9% 120.3% 128.7% 137.1% 69.76% 76.48% 83.20% 89.92% 96.64% 104.2% 112.6% 121% 129.4% 137.8% 70.32% 77.04% 83.76% 90.48% 97.20% 104.9% 113.3% 121.7% 130.1% 138.5% 70.88% 77.60% 84.32% 91.04% 97.76% 105.6% 114% 122.4% 130.8% 139.2% 71.44% 78.16% 84.88% 91.60% 98.32% 106.3% 114.7% 123.1% 131.5% 139.9% 72.00% 78.72% 85.44% 92.16% 98.88% 107% 115.4% 123.8% 132.2% 140.6% 72.56% 79.28% 86.00% 92.72% 99.44% 107.7% 116.1% 124.5% 132.9% 141.3% Multiplier for the pension amount for each month between 60 and 70 th birthdays 57
Pension calculation table for 2015 (adjustment factors: -0.58% per month before 65, +0.7% per month after 65) AGE 60 61 62 63 64 65 66 67 68 69 70 65.20% 72.16% 79.12% 86.08% 93.04% 100% 108.4% 116.8% 125.2% 133.6% 142% 65.78% 72.74% 79.70% 86.66% 93.62% 100.7% 109.1% 117.5% 125.9% 134.3% 66.36% 73.32% 80.28% 87.24% 94.20% 101.4% 109.8% 118.2% 126.6% 135% 66.94% 73.90% 80.86% 87.82% 94.78% 102.1% 110.5% 118.9% 127.3% 135.7% 67.52% 74.48% 81.44% 88.40% 95.36% 102.8% 111.2% 119.6% 128% 136.4% 68.10% 75.06% 82.02% 88.98% 95.94% 103.5% 111.9% 120.3% 128.7% 137.1% 68.68% 75.64% 82.60% 89.56% 96.52% 104.2% 112.6% 121% 129.4% 137.8% 69.26% 76.22% 83.18% 90.14% 97.10% 104.9% 113.3% 121.7% 130.1% 138.5% 69.84% 76.80% 83.76% 90.72% 97.68% 105.6% 114% 122.4% 130.8% 139.2% 70.42% 77.38% 84.34% 91.30% 98.26% 106.3% 114.7% 123.1% 131.5% 139.9% 71.00% 77.96% 84.92% 91.88% 98.84% 107% 115.4% 123.8% 132.2% 140.6% 71.58% 78.54% 85.50% 92.46% 99.42% 107.7% 116.1% 124.5% 132.9% 141.3% Multiplier for the pension amount for each month between 60 and 70 th birthdays 58
Pension calculation table for 2016 (adjustment factors: -0.6% per month before 65, +0.7% per month after 65) AGE 60 61 62 63 64 65 66 67 68 69 70 64% 71.2% 78.4% 85.6% 92.8% 100% 108.4% 116.8% 125.2% 133.6% 142% 64.60% 71.8% 79% 86.2% 93.4% 100.7% 109.1% 117.5% 125.9% 134.3% 65.2% 72.4% 79.6% 86.8% 94% 101.4% 109.8% 118.2% 126.6% 135% 65.8% 73% 80.2% 87.4% 94.6% 102.1% 110.5% 118.9% 127.3% 135.7% 66.4% 73.6% 80.8% 88% 95.2% 102.8% 111.2% 119.6% 128% 136.4% 67% 74.2% 81.4% 88.6% 95.8% 103.5% 111.9% 120.3% 128.7% 137.1% 67.6% 74.8% 82% 89.2% 96.4% 104.2% 112.6% 121% 129.4% 137.8% 68.2% 75.4% 82.6% 89.8% 97% 104.9% 113.3% 121.7% 130.1% 138.5% 68.8% 76% 83.2% 90.4% 97.6% 105.6% 114% 122.4% 130.8% 139.2% 69.4% 76.6% 83.8% 91% 98.2% 106.3% 114.7% 123.1% 131.5% 139.9% 70% 77.2% 84.4% 91.6% 98.8% 107% 115.4% 123.8% 132.2% 140.6% 70.6% 77.8% 85% 92.2% 99.4% 107.7% 116.1% 124.5% 132.9% 141.3% Multiplier for the pension amount for each month between 60 and 70 th birthdays 59