With early retire-ment no longer an option for many Cana-dians, the federal government proposed changes to the Canada Pension Plan earlier this year that further penalize those who take early retirement and increase the rewards for those who retire later on.

Additionally, support for later retirement may be further enhanced by allowing Canadians to continue to work while collecting CPP benefits — a significant policy shift that can prove beneficial, not only for late retirees but also for working individuals who have not maximized their CPP contributions.

The goal, according to a Depart-ment of Finance paper released in May, is to “better reflect the many paths people take to retirement” and to “provide greater flexibility for older workers to combine pension and work income if they so wish; modestly expand pension coverage; and improve fairness in the plan’s flexible retirement provisions.”

If Parliament and the provincial governments approve the reforms, phasing in of the changes will commence in 2011; those who take their CPP retirement benefits before 2012 will not be affected.

Under the existing rules, the amount an individual receives is reduced by 0.5% for each month before age 65 that CPP benefits are taken, to a maximum of 30%. Conversely, benefits are increased by 0.5% for each month after the age of 65 that CPP benefits are taken, to a maximum of 30%.

When the proposed changes come into effect, the amount an individual receives will be reduced by 0.6% for each month before age 65 that CPP benefits are taken, to a maximum of 36%; and increased by 0.7% for each month after age 65 that CPP benefits are taken, to a maximum of 42%.

Effectively, says David Ablett, director of tax and retirement planning with Winnipeg-based Investors Group Inc.: “The proposed changes make it attractive to delay taking CPP benefits for as long as possible.”

But whether your clients opt for earlier retirement vs later depends a lot on their personal circumstances, Ablett says, such as health, life expectancy and financial situation.

For instance, clients “who have the ability to reinvest their CPP income might want to start collecting benefits before 65,” he says. Someone who is not healthy may also opt to take the CPP early.

Deciding when to take the benefits also depends on how your clients feel about their life expectancy. If they believe they will be blessed with longevity, then, says Ablett: “Deferral becomes attractive because, eventually, you will generate a higher cumulative income by waiting rather than starting early.”

In such situations, he suggests, it is important to consider the “break-even age” when deciding the appropriate age to commence collecting CPP benefits. He defines this as “the age at which the total unreduced after-tax CPP benefits starting at, or after, age 65 become equal to the total reduced after-tax benefits starting prior to age 65.”

For instance, if your client starts collecting benefits at age 60, the break-even age under the existing rules would be 75 — under the proposed rules, 73 — assuming CPP benefits increase by 2% annually and are not reinvested. This means that at age 73, under the proposed rules, the cumulative payments received starting at age 65 would become equal to the cumulative payments that started at age 60.

“The break-even age is a wild card. No one knows how long they’re going to live,” argues Patricia Lovett-Reid, senior vice president with TD Waterhouse Canada Inc.in Toronto. “People do not necessarily retire early to take the CPP.” She doesn’t believe the changes will have an impact on retirement age, and considers the changes to be “pretty miniscule” and not “groundbreaking.”

On the other hand, Prem Malik, a chartered accountant and financial advisor with Queensbury Strategies Inc. in Toronto, argues that “a significant percentage of Canadians who do not have retirement plans believe that the government will look after them. [These individuals] look forward to the CPP at the earliest age possible.”

However, Malik says, “There is a lack of education about the CPP, especially when it comes to reduced benefits before 65 and increased benefits after 65. Many people are not aware of the premium for delaying retirement.”

Another important proposed change to the CPP is to allow Canadians to take their benefits as early as age 60 without any work interruption or reduction in earnings. Currently, individuals who apply to take their CPP benefits before age 65 must either stop working or reduce their earnings.

@page_break@“The government is anticipating that many baby boomers will continue to work after age 60,” says Ablett. “And even if they choose to retire, they will still engage in some form of work.”

Individuals who continue to work while collecting CPP benefits will be allowed to continue to contribute to the CPP, with contributions by those over 65 being voluntary. Effectively, additional contributions will result in greater benefits, calculated at 1/40th of the maximum pension amount per year of additional contributions. The maximum pension amount for 2009 is $10,905, but the exact amount of additional benefits depends on individual earnings.

Although the maximum pension is $908.75 a month in 2009, the average benefit is only $501.32. Therefore, the ability to continue to contribute will facilitate “increased participation,” says Lovett-Reid, “especially for individuals who have not maximized their contributions and individuals, such as older immigrants, who started making contributions late.”

Individuals will also benefit marginally from an increase in low-earnings “dropout” years used in calculating CPP benefits, says Ablett. Basically, benefits are based both on the number of years an individual has contributed to the plan and their earnings, calculated as 25% of an individual’s average adjusted career earnings, starting at age 18 and ending at the age at which benefits are taken. Therefore, someone retiring at 65 would have career earnings that span 47 years, which would allow for maximum benefits. The maximum earnings in 2009, for CPP purposes, are $46,300.

Currently, the benefit calculation drops 15% of the years employed, for an enhanced adjusted average income. “To get the full benefit at age 65,” says Ablett, “you would have had to earn at least the maximum amount determined by the CPP in each year for 85% of your working career.”

Under the proposed changes, the dropout would increase to 16% of years employed in 2012 and to 17% in 2014. IE