How to boost your CPP pension
Last fall, we talked about a 60-year old reader named Mila who’d started to collect a pension from the Canada Pension Plan, only to find that she wasn’t actually getting what she was entitled to.
Now, since her pension seems to have increased far beyond the rate of inflation, she worries that she may be getting too much and may have to pay back some of the money.
In my experience, that’s not very likely. Things can get a bit complicated, though, if you start collecting a pension from the CPP but continue to work — a choice that more and more Canadians seem to be making these days.
Two years ago, the federal government made several adjustments to the CPP. One of those changes was the Post-Retirement Benefit (PRB).
The PRB program allows Canadians who are over 60 and already receiving CPP benefits — but still working — to continue contributing to the plan and build up additional credit.
Between 60 and 64, you have to contribute to the plan on the same basis as everyone else, with matching contributions from your employer.
Between ages 65 and 70 though, contributions are voluntary. No further contributions are accepted after age 70.
Each additional year that you continue working and contributing after your pension kicks in will earn you a new PRB — which will increase with the cost of living and be payable for the rest of your life, the same as your regular pension.
You don't need to apply for a PRB; it shows up automatically following the year in which you contribute. While you probably won’t receive the added payment until April or May of the following year, it will be retroactive to January.
And that’s the pension boost that Mila, quite appropriately, has been receiving — with another bump on the way any day now.
The actual amount of PRB that you’ll receive depends on your earnings and your age, explains Doug Runchey, a B.C. pension consultant with three decades of experience working with the federal government's Income Security Programs.
If you’re aged 65, for instance, the maximum monthly CPP pension that you can receive in 2014 is $1,038.33. The maximum PRB would be about 1/40th of that, or $25.96 a month for an annual maximum of $311.52.
If you’re any age other than 65, however, both CPP and PRB benefits are actuarially adjusted — trimmed down before 65 and increased past 65. And this is where it gets a bit complicated.
Below age 65, both CPP and PRBs for 2014 are reduced by a factor of roughly 6.7 per cent per year. Above age 65, they’re increased by a factor of 8.4 per cent per year, Runchey explains.
Given that you really have no choice prior to age 65, is this then a reasonable deal? He thinks so.
Here’s an example of a maximum contributor (that would be someone making $52,500 or more this year) who would be making an annual contribution of $2,425.50 to the CPP, with a matching amount from the employer.
Assuming you’re 60 years old, collecting a CPP pension and still working, those contributions would earn a PRB of about $228 annually in the first year.
This would be followed by a PRB in each subsequent year of $249, $270, $291, and $312. That means, at the end of the fifth year, the total PRBs would be about $1,350 annually, indexed for life. Your CPP contributions for those five years would have been $12,128.
In return for these contributions, if you lived, say, until 85, you’d collect approximately $27,000 in PRBs, plus what you’d received during the five years from 60 to 65 (approximately $2,490) for a total of $29,490.
As a result, the PRB payback is on the order of 11 per cent per year, Runchey estimates. If you’re self-employed, however, the return is half that since you must pay both employee and employer portions of the required CPP contributions.
Starting at age 65, when you can opt out if you choose, it’s really all about longevity. It would take close to eight years until age 73 for your total PRB received to equal the cost of those voluntary 2014 contributions to the CPP.
If you decided to contribute the following year also, you’d qualify for a second PRB. For that contribution, you’d break even in slightly more than seven years, Runchey notes.
But, again, things aren’t so clear cut for those who work for themselves. Since the “cost” of contributing is essentially double for a self-employed person, the break-even period would actually stretch well into your 80s.
This suggests that continuing CPP contributions past 65 might be a sound choice for workers with employers still picking up half the cost, but somewhat less so for those who have to pay both ends, Runchey concludes.
Got a question about investing, saving or retirement? Send Gordon an email and we might answer your question in a future column.
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