Finance Canada Releases Proposed Pension Changes
At a time when individuals are concerned, and justifiably so, about planning for their retirement and the income sources they can rely on, a major revamp of the Canadian Pension Plan is being considered. Based on two recent news releases, the question being asked by many is: Are Canadians able to rely on the public pension plan provided by the government, or should they be saving for their golden years through their own retirement savings plans?<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />
A June 1st article in the Globe & Mail regarding Canadian retirement savings plans states that private-sector pension coverage was available for only 23.7% of employees in 2006, down from 30.5% in 1991. This almost 7% drop in private pension plan availability means that individuals will be looking to the government to provide some form of retirement pension income to top up their own RRSP's.
An information paper was released by the Department of Finance at the end of May containing some recommendations for changes to the current Canada Pension Plan. As joint stewards, and as part of a regular three year review process, Federal, Provincial and Territorial Ministers announced that the current Canada Pension Plan is sound but are suggesting some changes be made to the plan. Changes have been recommended in order to provide greater flexibility for workers planning on retirement, or for those who would like to continue to work and beef up their pensions.
Some of the recommended changes that will improve flexibility and pension coverage for beneficiaries in the Canada Pension Plan are:
∑ Eliminating the work cessation test
∑ Increasing the number of low-earnings drop out years
∑ Allowing them to continue to work and make CPP contributions
The CPP was established in the mid 1960's to provide working Canadians with some basic income for retirement, and was intended to replace up to 25 percent of the pre-retirement employment earnings (up to certain maximums). In 2009 the maximum pensionable earnings amount was $46,300, and the current maximum annual retirement pension amount is $10,905.
As mentioned above, one change that has been recommended to the CPP is the removal of the work cessation test, whereby individuals under the age of 65 are required to stop working or reduce their earnings before applying for CPP benefits. The change would take place in 2012 and workers could apply for early benefits, without having to stop working or reducing hours worked in order to qualify.
Another significant change that has been suggested for implementation is to increase the general low earnings drop-out amount. Under the current rules, 15% of years where earnings were either low or nil are allowed to be dropped from the CPP retirement pension amount calculation. This drop-out amount allows for periods of unemployment or full time attendance at school to be disregarded for calculating the pension maximums. The proposed change would increase the drop-out rate to 16% in 2012, and 17% in 2014 and allow for an increase in the average career earnings amount due to periods of low earnings.
Another recommendation would allow recipients of the CPP pension to return to work and continue to make CPP contributions in order to increase their retirement benefit amount. It would allow workers to collect their pensions and at the same time build a secure source of income for the future.
The Chief Actuary of the CPP will be assessing the long-term financial implications of the changes outlined above and a bill will be tabled by the Government.
Questions or comments regarding these changes can be sent to the Federal Government by e-mail before July 31st, 2009 to CPP2009@fin.gc.ca.
We are also interested in hearing your feedback regarding the proposed changes to the Canada Pension Plan, and the state of retirement income planning overall.
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