The new CPP

There has been quite a bit of cheering already for the proposed changes to the Canada Pension Plan, which the federal government unveiled this week. But you may want to look closer at the fine print (and do some number crunching) before thanking Finance Minister Jim Flaherty yourself.Â

The changes to CPP are supposed to reflect, in the government’s words, “the many different paths people take to retirement today.” True enough. These days, some of us want to retire early, others want to keep working past 65. Many more wish to ease into retirement by working part-time for a while.Â

By far the biggest change to CPP will let Canadians keep working while collecting retirement benefits. Under the current rules, if you take early retirement, but want to keep working, you have to stop working for two months or substantially reduce your income for two months. After the two-month period ends you can go back to work or earn more and you’ll still qualify for CPP. The government wants to eliminate that red tape. Under the new rules, which take effect in 2012, you’ll be able to keep your old job while collecting CPP. The idea is that if you work for your old employer part-time, CPP will help supplement your income. So you’ll earn as much as you used to when you were working full-time.

Sounds great, but watch out for two catches. The first is that the government is reducing CPP payments to early retirees. Instead of collecting 70% of your full CPP if you retire at 60, you’ll only get 64%. That’s a significant drop, says Robert Abboud, a certified financial planner in Ottawa and author of No Regrets: A Common Sense Guide to Achieving and Affording Your Life Goals. It adds up to around $660 less in CPP a year for someone who qualifies for the maximum benefits.

Catch number two is you’ll have to pay into CPP if you keep working past 60. That’s a huge change from the current system in which anyone collecting CPP while working doesn’t pay into the program. Abboud figures it will end up costing working retirees hundreds of dollars more a year through payroll deductions. “What they’re proposing doesn’t seem like a winning proposition for my clients’ pocketbooks,” he says.

Abboud isn’t impressed either with another proposed change to CPP–one that will encourage people to work well past 65. Under the current system, anyone who delays retirement until 70 sees their benefits boosted by up to 30%. Under the new program, benefits increase up to 42%.

Again, it sounds great, especially if your RRSPs were decimated by the stock market collapse last fall, and you think you’ll need to work past 65 anyway. But as Abboud points out, the reality of working at 70 isn’t pretty. Most of your peers will have long since retired and it’s hard to keep up with the physical demands of going into the office every day at that age. The best retirement years are actually during our 60s, when we’re still relatively healthy and able to take long vacations and shoot 18 rounds on the golf course with ease.

He’s right. Encouraging people to work longer may be good for the economy and for government coffers. But it’s hardly going to make your retirement more enjoyable. If you work until 70, you may find the best years of your retirement were squandered behind a desk.

The government has an information paper detailing all the proposed changes to CPP. You can read it at http://www.fin.gc.ca/n08/data/09-051_1-eng.asp

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