CPP disability benefit versus early retirement pension
Written by Doug Runchey
Doug Runchey worked for the Income Security Programs branch of Human Resources and Skills Development Canada for more than 32 years, and was a specialist in the Canada Pension Plan and Old Age Security legislation, regulations and policy areas. He now runs his own company, DR Pensions Consulting, which provides pension advice, including detailed calculations for CPP retirement planning and “credit splitting” purposes. Doug can be reached by email @ DRpensions@shaw.ca or check out his website at http://www.drpensions.ca/.
If you are over 60 and qualify to receive a Canada Pension Plan (CPP) disability benefit, you are better off applying for that benefit than applying to take your CPP early. Let’s take a look at who is eligible for a CPP disability benefit, how the benefit is calculated, and what you need to know about your options.
Who is eligible for a CPP disability benefit?
In order to qualify for a CPP disability benefit, your condition must meet the legislative definition of “severe” and “prolonged,” and you must have made contributions for at least the minimum qualifying period (described below).
Severe means that your disability makes you “incapable regularly of pursuing any substantially gainful occupation.”
Prolonged means that your disability is “likely to be long continued and of indefinite duration or is likely to result in death.”
Each of the words in the above definitions has a specific meaning within the disability guidelines that have been developed, but for the purposes of this article let’s just consider that they mean that you are permanently incapable of doing any type of paid employment.
There are currently two methods of meeting the minimum qualifying period, as follows:
· You must have made CPP contributions for at least four of the last six years in your contributory period, or
· You must have made contributions for at least 25 years, at least three of which must be within the last six years of your contributory period.
How is a CPP disability benefit calculated?
A CPP disability benefit is a monthly benefit that consists of a flat-rate portion ($453.52 for 2013) plus 75% of a person’s calculated CPP retirement pension.
Related article: How to calculate CPP Retirement Pension
Let’s assume the maximum CPP retirement pension is $1,012.50, we can calculate that the maximum CPP disability benefit for 2013 would be $1,212.90.($1,012.50 x 75% = $759.38 + $453.52 = $1,212.90)
Should I apply for a CPP disability benefit or an early retirement pension?
If you think that you meet the medical and contributory requirements for a disability benefit, you should always apply for that. This is because the amount of a disability benefit is always more than a retirement pension, and when you reach age 65 it will convert automatically to an unreduced retirement pension. If you apply for an early retirement pension, it will be paid at that reduced rate for life.
If you do apply for a disability benefit and are denied because you don’t meet either the medical or the contributory requirements, you will be offered the option to have your disability application used as an application for an early retirement pension. Since the disability adjudication process normally takes several months, this means that your early retirement pension would effectively be paid retroactively.
One further option that exists is to submit simultaneous disability and early retirement applications. Your early retirement application will be approved immediately, and if your disability application is eventually approved, it will replace your early retirement pension at the higher rate. The advantage of this is that it guarantees that you have an income stream while your disability application is being adjudicated.
What happens to my disability benefit at age 65?
As mentioned above, a CPP disability converts automatically to a retirement pension at age 65. The easiest way to estimate the amount of the retirement pension in this situation is to subtract the flat-rate portion of the disability benefit and divide the result by 75%.
Example: Susan is receiving a CPP disability benefit of $850.00 per month. When she turns age 65 in 2013, her disability benefit will convert to a retirement pension of $528.64.
($850.00 – $453.52) / 75% = $528.64).
How much would I receive in disability benefit versus an early retirement pension?
Just for comparison, if in the example above Susan had applied for an early retirement pension at age 60 instead of applying for a disability benefit, her retirement pension at age 65 would have been reduced by the actuarial adjustment of 30% for taking it early. As a result, it would have been approximately $370.05 (70% of $528.64 as calculated above).
Related article: Should I collect CPP retirement pension early?
By applying for a disability benefit at age 60 instead of applying for an early retirement pension, she is ahead by $158.59 ($528.64 – $370.05) monthly at age 65. In addition, she received the higher CPP disability pension of $850.00 for five years instead of the early retirement pension of $370.05, for a total of $28,797.00 more during those five years ($850.00 – $370.05 = $479.95 x 60 months = $28,797.00).
So you can see that if Susan is eligible for a disability benefit and pursues that option, she is much further ahead than if she applies for an early retirement pension. This applies both to the period of time that she receives the disability benefit, and after it converts to a retirement pension at age 65.