Think Twice Before Taking Early CPP

Gordon Pape says new rule may cost you.

Coming up to your 60th birthday? Thinking about applying for Canada Pension Plan benefits as soon as you are eligible? Planning to keep working after that? You may want to think it through again.

Or perhaps you are already receiving CPP payments and are under 65. You’re still working or considering taking a part-time job. Well, you’re in for an unpleasant surprise.

Some Canadians in these situations have just woken up to the fact that CPP amendments that take effect in 2012 are going to cost them hundreds or even thousands of dollars a year. But most are unaware of the impending assault on their wallets. As they discover the truth, outrage is growing.

The new rules bring a range of changes to the CPP, including higher penalties for applying before 65, greater incentives to delay taking your pension until age 70 and an increase in the percentage of low-income years that can be dropped in the calculation of the retirement benefit. These were explained in my column in the October 2009 issue (read it on They came as a result of a series of federal-provincial-territorial meetings on the future of the CPP. Finance Minister Jim Flaherty said at the time they were designed to improve “fairness” and “flexibility” in the plan but the underlying rationale appears to reflect the government’s concern about Canada’s aging population and to encourage people to stay in the workforce.

Back in 2009, we were assured that the changes would not affect anyone who began drawing CPP benefits before 2011. Now it turns out that is not the case. There is one very significant exception, and it will hit many CPP recipients under 65.

In the past, once you began drawing CPP benefits, you no longer had to make contributions. Technically, you were “CPP exempt.” That’s why both my wife and I applied for CPP as soon as we turned 60. Between us, we were paying thousands of dollars a year into the fund (we had to pick up both the employee and employer shares). By collecting our pensions as soon as we were eligible, we were able to cut off that cash drain immediately.

Starting next year, that will no longer be possible. Anyone between 60 and 65 who draws CPP benefits while continuing to work will be obligated to continue making contributions to the plan at the same rate as everyone else. There is no grandfather clause to exempt those who applied before the new rules take effect. For example, if you applied for benefits in 2008 when you were 60 and are still earning income, you will have to start paying into the plan again as of January.

Ironically, the government has actually made it easier to draw an early pension and keep working. In the past, you were required to stop work for a short period of time in order to apply. Now there is no work cessation test. It appears that Ottawa is quite happy to have you take a reduced CPP
at age 60 while continuing to pay money into the pot.

The realization of what’s about to happen has prompted some outraged emails such as this one from Peter B. in Mississauga, Ont.: “I turned 60 on June 22, 2010. I applied for early CPP and received my first cheque in December. I am self-employed and will continue to work until the age of 65. As I am self-employed, I paid my personal portion of CPP as well as the employer portion. I have heard that starting in 2012, I must pay into CPP once again even though I received my first pension payment in 2010. If this is correct, I would not have elected to take my early CPP. [If possible,] I would return any payments received to the government and retire with my full pension four years from now.

“These rules need to be grandfathered. Had I known this, I would not have reduced my pension by 30 per cent for the rest of my life and then continued to pay the maximum CPP for the next four years.”

To be fair, you do get some credit for those extra contributions. The government is introducing a Post-Retirement Benefit (PRB). Each year of work will provide an additional PRB “that will begin the following year and will be paid for life,” according to the CPP website. The PRB will be added to your retirement pension, even if the maximum pension amount is already being received.

After reading this in my Internet Wealth Builder newsletter, Norm B.
wrote: “That letter … is likely to inflame many 60-year-olds across Canada, like me, who feel we’ve been snookered. When I applied for early CPP, this PRB was not one of the listed side-effects. All I really cared about was the fact that I could finally stop contributing. Now, it seems the rules have changed. The government can call it a PRB, but it sure sounds like a modified CPP. And we all thought we were done paying into that for good.”

I asked the Department of Finance for an official explanation of exactly how the PRB will work. Here is what they had to say: “The contribution rate for working beneficiaries will be 9.9 per cent of earnings between the basic exemption of $3,500 and the year’s maximum pensionable earnings ($48,300 in 2011), or $4,435.20, split equally between the employee and employer. Self-employed workers will pay both the employer and employee share. This is the same contribution rate paid by all other workers and their employers. Individuals making these contributions, including those already receiving a ‘maximum’ CPP pension, will see an increase in their CPP retirement benefit. Working beneficiaries will accrue further CPP benefits for their contributions at a rate of 2.5 per cent of the maximum CPP pension amount ($11,520 at age 65 in 2011), adjusted for earnings and age. The increased CPP pension amount will be paid annually and will be indexed for inflation.

“This change will affect all working beneficiaries, starting in 2012, including those who took up their CPP pension in 2011 or before. This will ensure that all working beneficiaries are treated consistently with respect to CPP contributions and pensions.”

Here’s what that response boils down to. If you’re under 65 and are drawing CPP, you will be required by law to start making contributions again in 2012 – at the same rate as everyone else. Depending on your income and whether you are self-employed, that could be as much as about $4,500 a year (the contribution limit goes up each year with inflation). Once you turn 65, further contributions are

In return, you’ll receive a small boost in your CPP payments. To help clarify matters, the CPP (on the Service Canada website, uses the example of a fictional character named Jean-Philippe. He is 65 years old, takes his CPP pension and continues working part time.
He decides to voluntarily keep contributing.

The website says: “In 2012, he earns $24,800 and makes a CPP contribution of $1,054 (his employer also contributes $1,054). Because of that contribution, his annual pension amount will increase by an estimated annual Post-Retirement Benefit of $164 beginning in 2013. This increased annual pension amount will then grow with the cost of living, as measured by the Consumer Price Index.”

Using this example, the extra $164 would be the equivalent of an annualized return of 7.8 per cent based
on the total CPP contribution for
that year. Of course, as Finance points out, these figures would be adjusted for earnings and age, but they offer a guideline as to what we might expect. That 7.8 per cent return looks good until you consider it will be almost 13 years before Jean-Philippe is paid back all the money he and his employer contributed.

So what can you do if you have already started to draw CPP benefits and you’re under 65? It’s not well-publicized, but you can actually withdraw from the plan if you act within six months of starting to receive payments. You’ll have to send a formal letter to Service Canada (I suggest using registered mail). State your desire to stop receiving benefits and provide your full name, address and social insurance number. You will have to repay all the benefits you have received to date, but no penalty or interest will be charged.

Remember that even if you opt out of the CPP, you’ll still have to make contributions if you keep working. The difference is that the retirement pension you eventually receive will be significantly higher.