Many people are hurting financially in this recession, and the government has decided to help out with changes to the Canada Pension Plan (CPP). This is the same kind of help you might get from a stranger who sees you need money badly and offers you ten bucks for your iPod.
The two big proposed changes are as follows.
1. You will be able to draw CPP at age 60 while still working without taking two months off. This is welcome news for older workers who have been laid off and are having a hard time getting by on half as much pay at a new job. (Thanks to Preet for pointing out the poor wording of this point in the original version of this post.)
2. If you take CPP at age 60, it will be reduced by 36% instead of 30%. Payments used to be reduced by 0.5% for each month they start before age 65. This will be increased to 0.6%.
This second point is not well understood by some. If you take your CPP early, the reduction in pension amount is permanent. The pension will not go back up to the “normal” level at age 65. So, the extra 6% reduction will apply for the rest of your life.
The combination of allowing people still working to draw early CPP along with being in a recession will cause many people to make the short-term decision to draw CPP early. And the government is right there to help them out with a lowball offer of 36%-reduced CPP payments.
From an actuarial point of view, this increased early penalty makes little sense because people are living longer. The longer you live, the less enticing a reduced early pension becomes.
From the point of view of taxpayers, this is a good move by the government. CPP payouts will increase somewhat in the short term, but over the long run, the total benefits paid out will be lower.
I don’t blame people who choose to take early CPP despite the extra reduction. It’s possible that a person’s unique circumstances make this a wise choice. More likely, though, people will make choices based on their immediate needs. It’s good to know that when people are hurting, the government is right there to say “I’ll give you a hundred bucks for your car.”