Much has been written about the Canada Pension Plan (CPP) since May 2009 when the various federal, provincial and territorial finance ministers undertook their review. The changes that emerged from that analysis now provide an employee with greater decision-making power when it comes to working, and contributing to and receiving CPP benefits.
But how have these changes affected the employer?
“Perhaps some employers assume that, because it is the employee who gets to make certain CPP-related decisions, all the ‘thinking’ on these matters is undertaken only by the employee,” says Debbie Patton, account management consultant with Pal Benefits. “However, the reality is that whatever an employee decides to do, vis-à-vis new rules around continued work and/or contributions, it will have an impact upon the employer, too.”
The following is an overview of those CPP changes that may force some accommodation on the employer’s part.
Ability to continue to contribute
The change: As of Jan. 1, 2012, working employees aged 65 to 70 may choose to continue their CPP contributions on a voluntary basis (under age 65, those contributions are mandatory). Their CPP retirement benefit payments in future years will be increased through the post-retirement benefit (PRB).
What it means to employers: These additional contributions are voluntary to the employee; however, if a worker ages 65 to 70 chooses to participate in this new CPP feature, it is mandatory that the employer contribute, too. This means the following:
- employers need to be prepared that this may entail extra cost and administration; and
- since an employee in these circumstances may opt out later from CPP contributions, the employer must ensure that recordkeeping regarding voluntary CPP contributions are kept current.
Choosing to elect CPP payments early or late
The change: Prior CPP rules dictated that an individual who decided to accept CPP payments early (between ages 60 and 64) had his or her benefit reduced by 0.5% for each month before age 65. Similarly, an individual who delayed CPP payments until after age 65 saw his or her benefit increase by 0.5% for each month after 65 up until 70.
In 2011, the government began staggering the rate of increase or decrease to benefits depending on when an individual opts into the CPP payments, as follows:
- those who elect a late start to benefits (up until age 70) are now rewarded with an increase of as much as 42% by 2013, as opposed to the prior 30%; and
- those who choose an early start to benefits (before 65) will now experience a slightly greater benefit reduction of up to 36% by 2016, as opposed to the prior 30%.
What it means to employers: Before these changes, if a contributor decided to elect early CPP benefits, he or she was then locked in to that reduced benefit amount, provided that he or she did not return to work. With the elimination of the work cessation test (see the following paragraph), an individual may continue to work and collect CPP benefits at a reduced amount. However, employee and employer contributions to the CPP are required, at least up to the age of 65, and now—if the employee chooses—after age 65, too. As long as the individual continues to work and make contributions to the CPP until age 70, he or she will receive increased benefits through the PRB. Employers should prepare for the possibility that, starting in 2012, an employee who elects to receive CPP payments earlier may be forced to work longer in an effort to boost income level, and an employer will have to adapt.
Elimination of the work cessation test
The change: Starting in 2012, employees ages 60 to 64 can choose to start receiving their CPP payments without interruption to employment or earnings. Currently, the work cessation test dictates that individuals ages 60 to 64 who would like to start receiving CPP payments must either stop working or significantly reduce earnings for at least two months. With the elimination of the work cessation test in 2012, contributors can decide to start receiving CPP payments without any change in work-related income.
What it means to employers: Consider these various CPP changes altogether. If a contributor chooses to receive CPP benefits early, at some point from ages 60 to 64, the benefit received will lock in at a lower rate. Consequently, it is possible that an individual in this situation may require greater work income and will choose to work longer. With the elimination of mandatory retirement a number of years ago, an employer should consider what might occur if its older employees decide to continue working. In addition, if those same employees elect to continue CPP contributions in order to receive the PRB, the employer will also be required to make contributions longer than expected, perhaps up to age 70.
Many employees plan to work longer
Mark Dowdell, vice-president of retirement and investment services with Pal Benefits, sums up the situation: “Considering that multiple surveys indicate that most employees expect to continue to work in retirement [see CIBC’s survey results released in October 2011, which indicate that almost 70% of Canadians surveyed plan to do so], an employer would be wise to prepare for the expanded decisions now allowed to an individual CPP contributor and the impact his or her choices may have upon an organization.”