Wednesday, May 27, 2009

Canada Pension Plan Fire Sale

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.”


  1. I think you could always draw CPP at 60 and still work, you just had to be able to prove you had little or no income for a month or two, apply for CPP, and get back to work.

  2. Preet: You're right about the two-month delay rule -- I should have explained that exception. (I'll add it now.) This is an instance of people of different ages seeing this differently. The generation younger than baby boomers tend to think in terms of finding new jobs on a semi-regular basis. Older people (baby boomers) grew up in an era where many people worked their whole lives for one employer. The idea of quitting for two months and counting on finding a new job is far too frightening for most of these people. Unless an employer is willing to cooperate and promise to hire a worker back after 2 months, the 2 month rule is of little use to these workers.

  3. It depends which side the actuary looks at - with people living longer, an early retirement could add a lot to future expenses. I've started to wonder just what assumptions are being used any time someone talks about how much you need to retire. How much of it is based on people retiring now, rather than people just starting to work now?