The Canada Pension Plan may be the backbone of Canada's retirement income system but it is far from perfect.
The CPP contains some quirky rules that can be detrimental to your financial security, or that of your spouse if he or she survives you. The federal government can and probably should do something to fix them. If you haven't heard about them before, it is because some of these rules are rather obscure.
I will focus on two rules in particular. The first is the contributory period. Between ages 18 and 65, you are required to contribute to the CPP as long as you have employment earnings. If you had worked since 18, you would have had to contribute for the entire 47 years. And if you defer the start of your CPP pension until the age of 70, you could be contributing into the plan for as long as 52 years.
To earn the maximum CPP pension, however, you have to contribute the maximum annual amount for only 39 years (less if you stayed home to raise children). Some years of low earnings or no earnings can be dropped out for calculation purposes.
So consider two long-term contributors, Al and Jeff, who both reach 65 in 2017. Al got his first job at the age of 18 and worked diligently right up until 65 – a period of 47 years. Jeff started working at 26 and retired at 65 – hence, 39 years. If they both contributed the maximum each year, they both get the same $1,114 a month from the CPP. Al, however, would have contributed about $18,000 more in today's dollars ($36,000 more if he was self-employed).
While I'm curious to know the government's rationale for why Al has to pay in so much more than Jeff, it may be instructive to learn what rules apply to the federal government employees who drafted the CPP rules.
Those government employees participate in a plan called the Public Service Superannuation Plan (PSSP for short). This is a monolithic arrangement that covers nearly 500,000 public-sector employees, retirees and other beneficiaries. To get the maximum pension payable under the PSSP, a federal civil servant has to contribute for just 35 years. After they have completed 35 years of pensionable service, they are not allowed (much less required) to continue contributing, other than a trifling 1 per cent of pay to cover a fraction of the cost of future inflation protection. So the "Al problem" does not arise under the PSSP.
Another anomaly is the way the surviving-spouse benefit works under the CPP. A surviving spouse who is 65 or older gets a survivor benefit of 60 per cent of the deceased contributor's CPP pension. Or at least that is the basic rule but there are complications. In particular, the survivor benefit is subject to a cap that can be quite punitive. The survivor benefit plus the survivor's CPP pension based on her own contribution history cannot exceed the maximum CPP pension payable to an individual. If the survivor was already receiving the maximum CPP pension, for example, she gets no survivor benefit at all.
On the other hand, if the survivor had never worked and earned no CPP pension, the maximum survivor benefit in 2017 is $668 a month. This benefit has a present value of over $160,000, which is a lot to give up. Once again, we can debate the fairness of not paying the survivor benefit to a survivor who has earned a CPP pension of her own or we can look to the rules under the PSSP for another perspective on what is appropriate.
Under the PSSP, the survivor benefit payable to the spouse of a career civil servant with average earnings would be approximately $26,000 a year. That has a present value of over half a million dollars.
It's not the present value we should focus on but whether or not the surviving spouse in this case still gets her PSSP survivor benefit if she happens to have a PSSP pension of her own. The answer is that she does; unlike the CPP benefit, that PSSP survivor benefit is not capped.
I'm open to hearing an official explanation why this difference in rules between the CPP and PSSP makes sense. The logic escapes me.
Frederick Vettese is the chief actuary of Morneau Shepell and author of The Essential Retirement Guide: A Contrarian's Perspective.