Understanding the CPP post retirement benefit
Written by Doug Runchey •
What are post-retirement benefits?
The CPP post retirement benefit (PRB) program allows Canadian who are receiving the CPP but still working and contributing to the CPP to receive additional benefits for their contributions.
The program started in 2012 and the first PRB payments were made in 2013.
Previously, once you started receiving CPP retirement benefits, you could no longer contribute to the CPP. Now:
· If you are between 60 and 65 years old, receiving CPP and still working, you must contribute to the CPP.
· If you are between 65 and 70 years old, receiving CPP and still working, you can choose whether to contribute. (To stop contributing, you must fill out a Canada Revenue Agency form.
Between 60 and 70, if you are receiving CPP, working, and contributing to the CPP, you will earn a PRB for each year of your contributions.
How do I get a PRB?
You don’t need to apply for a PRB; you will automatically receive it the year following your year of contributions. Your PRB is effective in January but you may not receive the payment until April or May, with a retroactive payment to January.
The PRB will be added to your monthly CPP pension, even if you are already receiving the maximum CPP retirement amount. The PRB payments will continue for the rest of your life. They are indexed to the cost of living, the same as the regular CPP retirement pension.
Each additional year that you continue working and contributing after you start collecting CPP will earn you a new PRB that will be added to your monthly CPP benefit the following year.
How much will I receive?
The amount of PRB that you will receive depends on your earnings and your age.
If you are 65, the maximum monthly CPP pension that you can receive in 2014 is $1,038.33, and the maximum monthly PRB is about 1/40th of that, or $25.96. The maximum annual PRB is $311.52.
If you are any age other than 65, both CPP and PRB amounts are adjusted — reduced before 65 and increased past 65. Below age 65, both CPP and PRBs are reduced by a factor of 6.72 per cent per year (.56 per cent per month). Above age 65, they are increased by a factor of 8.4 per cent per year (.7 per cent per month). (These percentages are for 2014. The below-65 numbers will change slightly until 2016; the above-65 numbers will not change.)
The Service Canada website provides an estimate of the PRBs you would receive for a single year of contributions based on your age and employment earnings.
How does it compare to my contributions?
Using a maximum contributor as an example, we can look at the numbers.
In 2014, a maximum contributor makes an annual contribution of $2,425.50 to the CPP. (A maximum contributor is a person who earns more than the Year’s Maximum Pensionable Earnings (YMPE). For 2014, the YMPE is $52,500.)
If this maximum contributor is 60 years old, and is collecting CPP retirement pension and still working, their contributions will earn PRBs:
· Their first year of contributions earns a PRB of about $228 annually, indexed, for life.
· Their second year of contributions earns a PRB of about $249 annually, indexed, for life.
· Their third year of contributions earns a PRB of about $270 annually, indexed, for life.
· Their fourth year of contributions earns a PRB of about $291 annually, indexed, for life.
· Their fifth year of contributions earns a PRB of about $312 annually, indexed, for life.
At the end of the fifth year, their total PRBs will be about $1,350 annually, indexed, for life.
Their CPP contributions for the five years 60 to 65 would have been $12,128.
In return for these contributions, if they live for 20 years past age 65, they will receive approx $27,000 in PRBs, plus what they received during the four years from 61 to 65 (approx $2,490) for a total of $29,490.
All numbers are approximate, are for a maximum contributor, and are in 2014 dollars.
For a 65-year-old maximum contributor, the PRB payback is a return of about 13% per year, indexed, for life. (Maximum PRB of $312/maximum CPP contribution of $2,425.50 = 12.86 per cent).
For a self-employed person, who must pay both employee and employer portions of the CPP, the return is half that of an employee.
Two situations where payback is better
There are two situations where the payback for PRBs is even better than for most contributors, and that’s for a low wage earner or someone nearing age 70.
No one contributes to the CPP on the first $3,500 of their income (the Year’s Basic Earnings). So in effect, a low wage earner is contributing less than 4.95 per cent of their overall earnings to the CPP (4.95 is the percentage of their earnings that employees currently pay into the CPP). For example, a fictitious person who earned $3,501 would contribute $0.05 to the CPP for the year. Their PRB the following year would be about $1.75 per month or $21 per year.
If a contributor is nearing age 70, their PRB will be increased by 42% (8.4 per cent x 5 years or 60 months x 0.7 per cent). (This is the post-65 increase that is applied to both the CPP and PRBs, as described earlier.) So a maximum CPP contribution of $2,425.50 will earn a monthly PRB of approx $37 ($26 x 142%) — or about $442 per year indexed for life. This is a return of $442/$2,425 = 18 per cent.
To stop contributing
If you are over 65 and want to stop contributing to the CPP, you must complete the CPT30 form and give a copy to your employer. If you are self-employed, you must complete the appropriate section of the CRA CPP contributions on Self-Employment and Other Earnings and file it with your income tax return.
You can change your mind and start contributing to the CPP again but you are allowed only one change per calendar year.