To keep benefits flowing to current and future recipients, the Canada Pension Plan has to cheap out in certain areas.
A prominent example in these inflationary times is the CPP death benefit. For the past 25 years, the maximum payout has been a mere $2,500 paid in a single lump sum. The CPP retirement benefit increased 6.5 per cent in 2023 to offset the rising cost of living, while the value of the death benefit was yet again reduced by inflation.
“The CPP death benefit is a pittance,” said Lea Koiv, an accountant who has written extensively on the CPP for a publication serving advisers and planners. “I jokingly call it the coffin benefit, but it’s not enough to acquire that coffin.”
Indexing the death benefit to inflation or increasing it outright would be a big help to middle- and lower-income families when a loved one dies. It’s unlikely to happen, though. While the federal Liberals promised in the last election to increase the much-criticized CPP survivor’s benefit by 25 per cent, the death benefit has long been ignored. Ungenerous death and survivor’s benefits are part of the cost of a reliable CPP.
On the list of the 100 biggest things to worry about in your financial life, rank the health of the CPP at No. 100. The reason is that much work has been done in recent decades to ensure that contributions from workers and employers are sufficient to pay the plans’ obligations now and well into the future.
Premiums have been rising in recent years and will continue to do so in order to keep the core retirement and disability benefits strong. Leaving the death benefit vulnerable to inflation is part of this same process. Increase this payout and we might have to raise premiums further.
Same for the survivor’s benefit, which at best offers a fraction of the benefits paid to a deceased CPP recipient. If the surviving partner gets the maximum CPP benefit or close to it, the survivor’s benefit would be zero.
Until the CPP reforms of 1997, the death benefit was set using a method that paid out a maximum of $3,580. After 1997, the benefit was calculated as six months of the deceased contributor’s CPP retirement pension at age 65, up to a maximum of $2,500. A small improvement made in 2018 was to create a flat benefit of $2,500. “They simplified the conditions, and those with lower incomes benefited,” Ms. Koiv said. “But it’s still minimal.”
Adjusted for inflation, $2,500 in 1998 would be worth $4,262 today. Considering it’s taxable, Ms. Koiv said today’s benefit is worse than it appears.
There’s a psychological cost to the stinginess in the death and survivor’s benefits. It gets people torqued about the idea of making a lifetime’s contributions to the CPP and then dying shortly after retiring. Now you understand why so few people wait until age 70 to start collecting CPP, even though you get higher benefits for delaying past 65.
People would rather collect a lower benefit earlier in life. That way they reduce the risk of dying young and leaving money on the table. Actuaries say the bigger risk is living long and running out of money, but this somehow seems harder to visualize than dying young.
Small as it is, the death benefit is worth claiming. The executor for an estate should make the claim within 60 days of the death of a CPP contributor. A surviving spouse or next of kin can also make the claim, which can be submitted by mail or online. You’ll need documentation of the date of death, such as a death certificate.
As for what to do with your benefit, it’s worth pointing out that the funeral industry has been a leading advocate of increasing the current $2,500 limit. Insurer Sun Life Financial says the cost of a traditional burial is between $5,000 and $10,000, while cremation can cost $2,000 to $5,000 on average.
Ms. Koiv is an advocate for improvements in both the death and survivor’s benefits, but she acknowledges that they lead to higher contributions unless other benefits are reduced. Her response: “Let’s have that debate.”
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Rob Carrick