Should clients take CPP’s post-retirement benefit before age 65?

More than 2 million Canadians currently collect CPP’s post-retirement benefit (PRB). And yet the PRB is poorly understood, even though it was part of the CPP reforms introduced in 2012.

What is the PRB?

Prior to 2012, a person collecting CPP retirement benefits could become re-employed, or could have self-employment earnings, but would no longer be required to contribute to CPP. Such a person would be referred to as a working beneficiary.

Effective January 1, 2012, however, working beneficiaries younger than 65 (including those who had commenced receiving CPP retirement benefits prior to 2012) had to start contributing to CPP again. (Working beneficiaries who were 65 or older, but had not yet turned 70, could choose whether to contribute.)

To offset this news, the government also introduced the PRB. A person is only eligible for the PRB if they contribute to CPP while working after age 60 and are receiving the CPP retirement pension.

That means people aged 60 to 65 who are still working have a decision to make: Do they continue to contribute to CPP and defer the start of their CPP until age 65 (or even to as late as 70), or do they take a discounted CPP retirement pension, contribute to CPP and also receive the PRB?

A case study

Let’s consider Joan’s situation. She is currently age 60 and finished university at age 22. Since then, she has made maximum contributions to the CPP. Joan asked Service Canada for a copy of her Statement of Contributions to determine her earnings history.

Joan is deciding whether to start her discounted CPP at age 61, as she’s had health issues. She’s wondering whether she would get the maximum CPP (subject to a discount since she hasn’t yet turned 65) if she started to draw her CPP. A colleague told her she needs 40 years of maximum income to receive a maximum CPP retirement income.

The contributory period for purposes of calculating CPP benefits starts at age 18. If she starts drawing her CPP retirement pension at age 61, her contributory period would be 44 years (from age 18 to 61) or 528 months, and she would have worked for 39 years, or 468 months. The government allows for beneficiaries to exclude earnings for a certain period, with the result that the CPP retirement pension is higher than it would have been had periods of low or no earnings been included in the calculations. This period is called the general dropout period. The allowable dropout period for people who have never had children or been disabled is 17% of their contributory period. (Where someone has been collecting CPP disability benefits or has had children, and used either the disability or child-rearing dropout provisions, the calculation becomes more complex.)

Joan has never been disabled, and has never had children, so her dropout is 17% of the 528 months: 90 months. Thus, she only has to have made the maximum earnings for 438 months—36.5 years—to receive a maximum retirement pension (prior to discount), not 40 as her colleague told her.

With her dropout period being 90 months, the fact that she was in university for four years (48 months) does not affect her CPP. In fact, she could have been unemployed for a short period without impact.

The CPP retirement pension is calculated using “updated” average earnings over the contributory period, after excluding the earnings for the dropout period. Essentially, Joan’s historic pensionable earnings are increased—that is, updated—to current levels. In calculating Joan’s updated wages, since she had pensionable earnings equal to yearly maximum pensionable earnings (YMPE) from age 22 on, her pensionable earnings for each year are updated to equal the average of the most recent five years’ YMPE. In this case, we use the average of the 2013 to 2017 YMPE, which works out to $53,480. If she had earnings of, say, 50% of YMPE for any year, her updated earnings for that year would have been 50% of $53,480, or $26,740.

The maximum CPP retirement benefit for 2017 is calculated as 25% of the 2013-2017 average of YMPE (again, $53,480). Twenty-five percent of that average gives us $13,370 per annum ($1,114.17 per month).

Knowing this, Joan does a recalculation. At age 60, her contributory period was 516 months (43 years) and she had earnings at the maximum for 456 months. Accounting for the 17% dropout period, she only needed earnings at the maximum for 428 months, or 35.7 years. Since 456 is greater than 428, she is already eligible for the maximum retirement benefit (subject to a discount due to her age).

Joan now wonders if she should have already started her CPP, and is discouraged to discover she cannot backdate her application for a discounted CPP retirement benefit.

Joan turns 61 in October 2017. She remembers her CPP benefits are discounted by 0.6% for each of the months prior to when she would turn 65. (Where CPP starts after age 65, the amount is enhanced by 0.7% for each month of deferral. Hence, for the maximum 60-month deferral to age 70, the enhancement would be 42%.)

Thus, if her CPP retirement pension starts November 2017, the maximum retirement pension of $1,114.17 would be discounted by 28.8% (0.6% multiplied by 48 months). She would start to receive $793.29 per month.

If she continues to work while drawing CPP, she would be a working beneficiary as of November 1, 2017. Thus, she will be entitled to the PRB starting January 1, 2018, based on the contributions she made to CPP in 2017. If she had been a working beneficiary for the entire calendar year, the PRB she would receive in 2018 would be 1/40th of the maximum retirement pension for 2018. The PRB benefit is indexed each January 1.

For 2017, someone receiving the maximum PRB in respect of 2016 earnings would be receiving $1,114.17 ÷ 40, or $27.85, per month. This $27.85 is then discounted or enhanced by the same 0.6% or 0.7% factor that applies to the CPP retirement benefit. The calculation is done using the recipient’s age on January 1 of the year the PRB starts to be paid.

While $27.85 per month does not sound like a lot of money, it represents more than $300 per year, and someone could accrue PRB benefits until age 70, provided they are still working and contributing to CPP. The PRB could be accrued for up to 10 additional years.

In Joan’s situation, she was a working beneficiary for only two months, so CRA will prorate her pensionable earnings when calculating the PRB she would receive starting January 1, 2018. She doesn’t have to apply for the PRB—CRA will deposit the appropriate amount to her bank account shortly after assessing her 2017 personal taxes.

What Joan decides

Based on Table 1 (which ignores indexation), if Joan dies before age 80, she’s better off taking her CPP pension at age 61 and working until 65 so she could receive both the CPP retirement benefit and the PRB. If she lives longer than age 80, she’s better off delaying CPP until age 65 and not receiving the PRB. (The crossover point will be different for each client.)

Since Joan has health issues and her parents died young, she doesn’t foresee living past age 80. As a result, Joan plans to work for a few more years, draw a discounted CPP and contribute to CPP—so she will be a working beneficiary and receive the PRB. For 2017, she will contribute $2,564.10, or 4.95% of her YMPE. (Taking into account the employer match, the total contributed on her behalf is $5,128.20).

Joan has already earned the maximum retirement pension. If she had chosen not to start her discounted CPP while working, additional contributions would be made by both Joan and her employer, and the discount to Joan’s maximum retirement benefit would simply be reduced for each month that she is closer to reaching age 65. If she draws after age 65, her retirement pension would not be discounted. It would, in fact, be enhanced by 0.7% for each month of deferral after she has attained age 65. Since she has decided to take the discounted CPP, she receives both a retirement pension and the PRB.

Note that upon Joan’s death, the PRB does not factor into the calculation of survivor benefits. It also does not impact disability benefits. The PRB might be thought of as a life-only, fully-indexed annuity.

Many CPP calculators do not account for the PRB, but as we’ve seen, it can tip the scales when deciding whether or not to draw CPP. When helping clients decide, be sure to consider the PRB as well as health issues, current and future tax rates, and survivor benefits.

Table 1: Crossover point for Joan (ignoring indexation)

Scenario A: Joan starts drawing discounted CPP at age 61, and remains a working beneficiary until age 65

Scenario B: Joan starts drawing CPP at age 65

When someone makes less than the maximum

Joan’s neighbour Sam also turns 61 in October 2017. He is self-employed and earns 50% of the YMPE for 2017. He contributes to CPP when he files his personal taxes via Schedule 8.

Any PRB he would earn would only be 50% of what Joan would earn. If he decides to work while drawing CPP at age 61, the amount would further be discounted by 28.8%, just as it is for Joan.

Lea Koiv, CPA, CMA, CA, CFP, TEP, is a tax, pension and retirement expert who has held senior roles at a national insurer and international accounting firms. Reach her at info@leakoivassociates.ca.

Lea Koiv

Tax & Estate

Lea Koiv , CPA, CMA, CA, CFP, TEP, is a tax, pension and retirement expert who has held senior roles at a national insurer and international accounting firms. Reach her at info@leakoivassociates.ca.