As of Jan. 1, the Canada Pension Plan (CPP) has been around for 50 years — and many have been calling for a revamp of the social insurance program.
In December, Federal Finance Minister Bill Morneau met with his provincial/territorial counterparts to discuss a number of issues, including potential CPP changes.
But the implementation of any changes are a long way off — so for now, it’s a good idea for HR professionals and payroll to have a good understanding of how the CPP works so they’re ready to answer any and all questions employees have about their contributions and benefits.
Contributions to the CPP
For the most part, all Canadians between the ages of 18 and 65 contribute to the CPP if they are working as employees or they are self-employed. People who are over 65 but under 70, who are working and receiving regular CPP retirement benefits can choose to contribute to the CPP. And those who are over 65 but under 70, working but not receiving regular CPP retirement benefits, must contribute.
CPP contributions are made only on earnings that are between the year’s basic exemption (YBE) and the year’s maximum pensionable earnings (YMPE) amounts. Since 1996, the YBE has been frozen at $3,500. The YMPE is linked to increases in the average industrial wage in Canada; for 2016, it is $54,900.
Employees contribute 4.95 per cent of their earnings between the YBE and YMPE to the CPP; the employer makes a matching 4.95 per cent contribution. For 2016, an employee earning at or above the YMPE will pay the maximum CPP contribution amount of $2,544.30 (($54,900 - $3,500) x 4.95 per cent).
A self-employed person pays both parts of the contribution at a rate of 9.9 per cent or $5,088.60 for 2016, if her net earnings from self-employment are at or above the YMPE.
It’s important to note the CPP is much more than just a retirement income plan. It also provides protection against a loss of employment earnings due to disability, as well as providing death benefits. The following is a basic explanation of all of the benefits payable under the CPP.
The age for qualifying for a full CPP retirement pension is age 65. However, a CPP retirement pension can be payable as early as age 60 (at a reduced rate) or as late as age 70 (at an increased rate). At age 65, a CPP retirement pension is intended to replace 25 per cent of someone’s “average lifetime earnings” (up to the YMPE), with the maximum monthly CPP retirement pension amount being $1,092.50 for 2016.
The calculation of someone’s “average lifetime earnings” is based on a complex formula but, in simple terms, it is a three-step process:
1. Escalate the lifetime earnings up to a current-year value.
2. Drop out 17 per cent of the lowest years of earnings (the general dropout), as well as any low-earning years where the person was the primary caregiver for a child under age seven (the child-rearing provision or CRP).
3. Average the escalated earnings over the number of years that remain after the dropouts have been applied.
For many people, the result will be their CPP retirement pension at age 65 is based on their best 39 years of earnings, taking inflation into account.
Notwithstanding the above, a CPP retirement pension is payable even if someone has contributed for only one year, although the amount of that pension would be small. Using the 39-year result, the maximum value of one year of CPP contributions at the YMPE level would be $28.01 (the maximum retirement pension amount of $1,092.50 divided by 39 years).
If someone wants to start receiving his CPP retirement pension earlier or later than 65, the amount of his pension will be:
• reduced by 0.6 per cent for every month he takes it earlier than age 65 (up to a maximum reduction of 36.0 per cent at age 60)
• increased by 0.7 per cent for every month he takes it later than age 65 (up to a maximum increase of 42.0 per cent at age 70).
The CPP retirement pension is considered taxable income and payable for life even if the person moves outside of Canada.
Post-retirement benefits (PRBs) are a new CPP benefit that began in 2012-13. They apply only to someone who continues to have employment earnings after she starts receiving her regular CPP retirement pension.
Before 2012, once a contributor started receiving a CPP retirement pension, he was no longer allowed to make further CPP contributions. Since 2012, if a contributor is still working, he is required to contribute to CPP up to age 65, even if he’s receiving a CPP retirement pension. Contributions are voluntary between age 65 and 70, but only if the person is receiving a CPP retirement pension.
A PRB becomes payable effective January of the year following the earnings, although it generally isn’t paid until May or June of that year, once the earnings and contribution are validated by the Canada Revenue Agency. The PRB is then calculated and paid retroactively to January.
Each additional year of contributions generates an additional PRB that is added to the CPP retirement pension and paid for life.
The amount of the PRB depends on the amount of pensionable earnings and the contributor’s age. The maximum annual PRB for someone who is 65 effective January 2016 is $27.31, if that person was receiving a regular CPP retirement pension throughout 2015 and her 2015 pensionable earnings were at or above the YMPE for 2015 ($53,600).
If someone has a disability that is “severe” and “prolonged” and he is under 65, he may be entitled to a CPP disability pension if he has made CPP contributions for at least the “minimum qualifying period” for the purpose of disability benefits. These terms are defined in the CPP legislation as follows:
• Severe: The conditions prevents her from regularly pursuing any substantially gainful occupation.
• Prolonged: Long and indefinite duration or likely to result in death.
• Minimum qualifying period: Four of the last six years immediately prior to becoming disabled, or at least 25 years in total, with three of those being during the last six years.
Disability benefits include a monthly disability pension for the disabled contributor, as well as a separate benefit for any dependant child of that contributor. A dependant child means someone who is under 18 or between 18 and 25 and in full-time attendance at school or university.
The monthly amount of a CPP disability pension is calculated as 75 per cent of what the person’s what the person’s CPP retirement pension would be at age 65, plus a flat-rate benefit ($471.43 for 2016).
This means a maximum CPP disability pension for 2016 is $1,290.81 (75 per cent of $1,092.50 + $471.43). The monthly amount for any dependant child for 2016 is $237.69.
A CPP disability pension is considered taxable income and is payable until the person turns 65 or until her disability ceases to meet the severe or prolonged definitions above.
Since CPP’s definition of disability is based on how a person’s condition affects his ability to work, it is important that anyone who is receiving a CPP disability pension knows how any attempt at returning to work might affect their eligibility for CPP disability benefits. I strongly suggest any employees in this situation contact Service Canada to ensure they fully understand their rights and obligations regarding returning to work.
Benefits payable after the death of someone who has made contributions for at least the minimum qualifying period for purposes of the death benefits include:
• a lump-sum death benefit, payable to the estate of the deceased contributor
• a monthly survivor’s pension, payable to the surviving legal or common-law partner of the deceased contributor
• a monthly child’s benefit, payable to any dependant child of the deceased contributor.
To qualify for death benefits, someone needs to have made CPP contributions for one-third of the years in their contributory period, with a three-year minimum. (The contributory period starts at age 18 and ends when someone starts taking her CPP retirement pension or when she dies.) Ten years of contributions is the maximum number required.
Other Canadian public pension programs include Old Age Security (OAS) and Guaranteed Income Supplement (GIS), and more information about all of these programs is available with Service Canada.
Doug Runchey owns and operates DR Pensions Consulting in Comox Valley, B.C. He can be reached at firstname.lastname@example.org or, for more information, visit www.drpensions.ca.
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