Posted by Tim Stobbs on May 28, 2009
Perhaps you already came across CC’s post on the proposed changes to Canada Pension Plan (CPP), if so great you have a bit of background. If not, I’ll do a very brief summary of the proposed changes and if they are good or bad for early retirement.
- You won’t have to quit working for two months prior to collect CPP early. Basically they decided this rule is unfair and so it’s going away. This is good for those that plan to do some work in early retirement. You will no longer have to quit around 60 for a few months just to start collecting.
- Drop out rate is going up from 15% to 17%. Again this a good for early retirement as you can have a few more lower income years and still collect a decant pension. You could now retire at 52 and have 8 zero income years without much of a drop in you pension.
- If you work between 60 and 65 you will have to contribute to CPP. This used to be optional, but now it is going to be required. If your over 65 it is still optional. This initially appears to be bad, but if you contribute during that time you pension will go up even if you are collecting a pension. So overall this one appears to be fairly neutral to early retirement.
- Early pension penalties have increased and so have late pension bonuses. If you take your pension before 65 you are now going to have a 0.6% reduction/month (current rate is 0.5%). If you take the pension later you will get an extra 0.7% (from the current rate of 0.5%). So at the extreme if you leave at 60 you will have 35% less pension or if you take it at 70 you will have 42% more pension (rather than usual 30% either way). Now this is a huge bad thing for early retirees, the playing field is basically encouraging people to hold off on collecting CPP. So what if you planned to collect at 60 under the old rules? Hold off for ten months and you will end up with a similar pension you would have got under the old rules (actually likely slightly better because of point #2 above). Easy and hardly enough to wreck most early retirement plans.
So in conclusion overall the changes may make you want to delay taking your CPP pension a bit, but only by 10 months or so. It’s not a huge change, so don’t change your retirement dream by more than a year. So what’s your thoughts on the CPP changes? Good, bad or just ugly?