Jim Clark, UWFA Salary and Benefits Committee Member
Human Resources recently circulated a memo about changes to CPP that start in January, and earlier offered a related seminar. People between 60 and 65 collecting CPP and still workingwill be required to make CPP contributions. However, people 65 to 70 years of age, collecting CPP, and still working must decide whether to contribute to CPP or not.
Specifically, the university will start deducting CPP contributions from salaries of Members aged 65 to 70 in January 2012, even if they collect CPP, unless the administration receives a form instructing payroll to not deduct further CPP contributions. A decision to contribute should be based on such factors as the benefits of further contributions and their cost.
Benefits
The additional contributions will produce increased benefits, called Post-Retirement Benefits (PRBs). The yearly PRBs beginning in 2013 from additional contributions for 2012 are shown below, assuming earnings in 2012 of at least $50,000.
Year Month Born
Born Jan Apr Jul Oct
1943 $406.94 $400.90 $394.85 $388.80
1944 $382.75 $376.70 $370.66 $364.61
1945 $358.56 $352.51 $346.46 $340.42
1946 $334.37 $328.32 $322.27 $316.22
1947 $310.18 $304.13 $298.08 $292.03
These values, and for other salaries, are available at:
http://www.servicecanada.gc.ca/eng/isp/cpp/prb/index.shtml
Each year of additional contributions produces a further increase in PRB, which is estimated into the
future at:
https://srv111.services.gc.ca/PRB_01.aspx
The following FAQ answers many questions (e.g., no survivor benefits with PRB):
https://srv111.services.gc.ca/PRB_FAQ.aspx
Cost
CPP employee contributions are 4.95% of pensionable earnings matched by 4.95% from employers. The dollar amount of contributions therefore depends on salary. People with maximum pensionable earnings of $50,100 or more in 2012 will contribute $2,306.70, matched by the employer. This represents 4.95% each of $50,100 minus $3,500. For salaries below this, subtract $3,500 and multiply by .0495. For example, a salary of $30,000 minus $3,500 equals $26,500 times .0495 = $1,311.75 in CPP contributions.
Weighing Costs and Benefits
The challenge is weighing costs and benefits. When I researched this topic on-line, some people said essentially to “take the money and run,” the apparent “reasoning” being that it is better for individuals to have the money than government. And one member’s accountant told him the same thing. But other sites, government, and several people I consulted implied or stated that people will probably benefit over time from further contributions to increase pensions given longer life expectancies. Others were reluctant to make recommendations because personal circumstances vary (e.g., salary, tax rates, whether money is needed now, life expectancy).
One approach is to estimate how many years of increased pension is necessary to earn back the additional deductions, and then guess whether you will live longer. Recalling that the PRB begins the year following the additional contributions and does not allow for survivor benefits and ignoring employer contributions, taxes, possible earnings from untaxed portion of money not deducted for CPP contributions, indexing of PRB, and other factors, the estimated years to retrieve employee contributed funds would be 2,306.70 divided by 292.03 equals 7.9 years for someone born October 1947 and 2,306.70 divided by 406.94 equals 5.7 years for someone born January 1943. If these calculations are valid, living longer produces some benefit from continuing to contribute past 65.
Conclusions
Retirement planning is complicated, including whether to resume CPP contributions to increase your PRB earnings. But based on this analysis, I conclude with some reservations (not being an accountant) that many people appear to benefit from the PRB, as argued by government and some financial advisors. If you instead want to stop CPP contributions, the required form should be submitted to payroll by 15 December. The form and instructions are at:
http://www.cra-arc.gc.ca/E/pbg/tf/cpt30/README.html
For more information on CPP changes, see:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/cpp-rpc/cpp-menu-eng.html
http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/postrtrben.shtml
Friday, December 9, 2011 at 10:28AM by