The Federal and Provincial finance ministers met again earlier this week to pursue their ongoing discussions on how to improve the Canada Pension Plan.

The majority of the provinces agreed to make the following changes to CPP:

New CPP Changes Explained

1. “Drop-out” becomes “drop-in”

Currently, CPP recipients can drop years of lower earnings from their retirement pension (17% of contributory period). In addition to that there is the “child rearing dropout provision” for a parent who has low or zero earning while being their child’s primary caregiver (under the age of 7).

Instead of this child rearing “drop out”, the new change will use a formula to determine the average income earned for the preceding five years and “drop it in” for the retirement amount calculation.

People eligible for CPP disability payments, now receive a fixed monthly payment of $471.43 plus 75% of their projected retirement pension.

The new formula will use 70% of average earnings for the prior six years for the disability amount.

There have been some concerns about whether these changes would actually improve benefits.

I know the child rearing drop-in won’t do much for me because I had my children at a young age and probably earned minimum wage in the couple of years previous.

2. Survivor benefits

Full survivor benefits will be paid to widows and widowers, regardless of age.

At present, full survivor benefits are only paid only if the survivor is over 45, disabled or raising a child. It is reduced by 120th each month the survivor is under 45 until it comes to zero at age 35. People under 35 would have to wait until age 65 to receive benefits. (The theory was that a widow(er) with no children or disability should be able to adjust financially by returning to work.)

The amendment will allow everyone to receive benefits immediately. Anyone who was previously denied will be able to reapply when the change comes into effect.

3. Death benefit

The maximum death benefit lump sum payment is currently $2,500. It is prorated depending on past CPP contributions.

The good news is that $2,500 will be paid for everyone regardless of past contributions.

The bad news is this amount has not changed since 1997 when it may have been enough to cover an average funeral. Today, it will hardly put a dent in the most modest funeral.

Final thoughts

The above amendments will go into effect in 2019.

The government assures us that there will be no increases to CPP contributions beyond those that were proposed in 2016 – but time will tell. Actuaries have not yet assessed the cost of these changes.

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