My recent column about choosing when to take Canada Pension Plan benefits sparked a lively discussion online (read the column and comments here). It also prompted readers to write in with questions. For this week's column, I asked Doug Runchey of DR Pensions Consulting on Vancouver Island to answer some of your queries.
1. Is there an argument for delaying CPP if one's spouse is much younger? Am I correct in assuming that CPP comes with survivor benefits?
Yes, CPP comes with survivor benefits, but delaying CPP does not increase the amount of the survivor benefit. This is because CPP survivor benefits are based on the "calculated retirement benefit" (which is the CPP benefit amount before any age-adjustment factor is applied) and not on the actual amount of CPP retirement benefit being received at the time of death.
2. What are the dropout rules?
The general dropout allows you to exclude the lowest 17 per cent of your lifetime earnings when your CPP is calculated. At age 65, this means you can drop out at least eight years of low earnings, so your CPP would be based on your best 39 years of earnings.
In addition, under the child-rearing dropout, you can exclude those years where your earnings were less than your average lifetime earnings and where you were the primary caregiver for a child under the age of seven.
3. If I have 39 years of maximum CPP contributions and decide to start taking payouts at 63, would the amount be reduced? If yes, and I choose not to work but to wait until 65 to collect, would I be penalized for two years of no contributions?
If you start taking CPP at 63, the amount would be reduced regardless of the number of years of maximum contributions. If you have 39 years of maximum contributions and decide to wait until 65, you will receive the maximum CPP available at 65 and will not be penalized for the two years of no contributions, because those two years of zero earnings would be dropped out under the general dropout provision. However, if you have fewer than 39 years of maximum contributions, the two years of zero contributions would offset part of the increase that you would receive by waiting.
4. For someone with many years of low income, is it possible to make voluntary CPP contributions in order to increase one's benefit?
No, it is not possible, although it was discussed as a possible option in the recent federal election campaign. At present, CPP contributions can be made only on employment or self-employment earnings up to the YMPE (Year's Maximum Pensionable Earnings) level, which is $53,600 for 2015.
5. If one has contributed the maximum and elects to delay drawing CPP until age 70 but dies at age 69, is any benefit payable to the estate? If not, should the loss of income for nine years be given serious consideration in determining when to start collecting?
In this situation, the estate would not be entitled to any retirement pension. There would, however, be entitlement to the same death and survivor pension benefits as if the person had been receiving a retirement pension. Yes, life expectancy is one – if not the main – of the considerations in determining when to collect CPP.
6. Your article stated that if you are retired and have fewer than the required number of years of maximum CPP contributions to receive a full pension, "your calculated retirement pension might decrease with each additional year of zero contributions" if you stop working and delay collecting your CPP. This is the first I have heard of this. I myself have worked less than 39 years. Am I looking at decreasing benefits for not having started my pension yet? I am 68 years old next month.
The term "calculated retirement pension" refers to the amount of pension that you would receive if you were age 65. It is equal to 25 per cent of your average lifetime monthly earnings adjusted for inflation and after the dropouts. Although your "calculated retirement pension" might decrease with each year of zero contributions, the amount of the decrease is almost always less than the amount of the increase due to the age-adjustment factor for waiting.
To illustrate this point, I use the example that if you wait, you will receive a larger slice of a smaller pie, but you will almost always receive more pie by waiting.
Your calculated retirement pension would not have decreased for any years of zero contributions after 65, because there is a separate dropout that applies to all low-earning years after 65, in addition to the general 17-per-cent dropout.
7. I am interested in your advice to someone of age 60 who has been displaced with very little chance of a new job. Would you recommend taking CPP early in this situation?
If you need the money to live on, obviously you should take your CPP early. However, if you have other sources of income, or savings, your decision would be the same as everyone else's. You would look at how much you would receive at age 60 versus any other age, as well as your life expectancy and other factors and make the appropriate decision.
8. Should I take CPP early if I think I'll be receiving the Guaranteed Income Supplement?
Future eligibility for the Guaranteed Income Supplement (GIS) is one of the reasons why taking your CPP at age 60 might be a good idea. GIS will generally make up for about half of the reduction for taking the CPP early. For example, you might take your CPP at age 60 and receive $700 or take it at age 65 and receive $1,000. If you took your CPP at age 60 at the lower amount, your GIS would be $150 more per month at age 65 than if you waited to take your CPP at age 65 (because GIS is clawed back at 50 cents for every $1 of income).
Receiving GIS will double the normal break-even period – that is, the number of years you would have to live for the higher benefit (started at a later date) to match the lower benefit (started at an earlier date). In other words, with the addition of the GIS, you would have to collect the higher amount for many more years before the totals were equal, compared with someone who does not collect GIS.
There is also the issue that CPP is taxable income and GIS is non-taxable, which even further strengthens the argument for taking your CPP early.
For more CPP questions and answers, see the "FAQ" at drpensions.ca.