The latest on the Canada Pension Plan: pension sharing, survivor benefits, ‘the big picture’
Barely a week passes without news on the Canada Pension Plan. There’s a lot going on right now, in fact, so let’s take a look.
Value of the plan
To see how the CPP has performed, it’s worth looking at how the total plan value has increased since 2009 — CPP fund at:
March 31, 2009 – $106.5 billion
March 31, 2010 – $127.6 billion
March 31, 2011 – $148.2 billion
March 31, 2012 – $161.5 billion
March 31, 2013 – $183.3 billion
Net investment income in the past year was $16.2 billion, roughly a 10% return. Clearly, the CPP investment board has performed quite well. The fund has never been valued higher, and for those who worry that there won’t be a CPP when they reach pension age, relax!
Note that anyone who applied for their CPP at age 60 now receives about 36% less than they would have had they waited for age 65, which they may regret in their 70’s and 80’s. Think carefully before applying at age 60!
The maximum monthly benefit for 2013 is $1,012.50. The average is much less, at $534.65. If you wait after age 65 to apply for the CPP benefits, you will receive 0.7% more in benefits for each month you wait. If you wait until the maximum age of 70, your benefit will be 42% higher than it would have been at age 65.
Meanwhile, if you work in B.C., are under age 65 and receive CPP benefits, you must make CPP contributions. However, these contributions can go toward the new Post Retirement Benefit (PRB).
Above age 65, the contributions are not mandatory, but if you continue contributing toward the PRB, you will receive those benefits in the years after you contribute. In 2013, the maximum PRB is $25.13 per month.
The CPP allows both married and common law couples to share their pension benefits to reduce income tax exposure. Depending on the income level of each spouse, sharing CPP benefits (which are taxable) may reduce overall family tax liability. Separation, divorce or death will end this tax benefit.
To start pension sharing, you’ll need to apply. Forms are available either online or at Service Canada offices across the Lower Mainland. You’ll need to send copies of Social Insurance Numbers and birth certificates.
All those meetings
Canadian Finance Ministers will be meeting again in June to discuss the CPP. Many groups and individuals across the country want the CPP benefit increased. The government is cautious, not wanting to increase contribution rates and knowing that the wave of new applicants is already requiring increased benefit outlays.
Given our demographics, the time will soon come when outflows will exceed inflows. The rate of return of the CPP is good, but it must continue to be good to ensure financial stability.
One of the CPP’s ongoing problems is the survivor benefit, where one member of a married or common law couple dies. The survivor not only loses their late spouse’s OAS, but also will typically only receive approximately 60% of their spouse’s CPP.
The rule is that the survivor can only receive the maximum CPP benefit that they’d receive in the year they started their CPP benefits, so if they were receiving the maximum CPP benefit of $1,012.50, in the year they started receiving their CPP, and then lost their spouse, their survivor benefit would be zero!
An article in the Toronto Star, earlier this week, cited the example of an Ontario Realtor whose wife died weeks after turning 60, having paid into the CPP all her life but never collected. The Realtor’s CPP survivor benefit was 98 cents (believe it or not) per month.
I hope that the Ministers will discuss the existing problems with survivor benefit. In my view, they should revamp the calculation of this particular benefit. In addition, the maximum CPP death benefit has remained at $2,500 for too long.
From the “big picture” perspective, the CPP is a good, well run plan. The CPP Investment Board‘s investments have proven successful in recent years and have helped the plan’s value grow considerably. If it continues, we will all be able to feel secure that the CPP will provide us a base income to help meet our expenses in retirement.
At present, the CPP benefit increases annually based mostly on the CPI (the national measured rate of inflation). It is significant that the government takes a cautious view in connection with other, proposed increases. Given how many of us will start receiving CPP benefits over the coming 15 years, the long-term stability of the plan depends on this conservative approach.
In my view, the most glaring weakness in the CPP lies in the calculation and actual amounts of survivor benefits. The calculation appears to lack any consideration of the loss in income that a survivor must bear after his or her spouse dies. Given the survivor’s loss of OAS benefits, a new approach to the survivor benefit calculation that takes into account this loss of income should be examined, considered and adopted.
This column ran in the Richmond News on May 31, 2013.