Canada's finance ministers agreed to a suite of changes to the Canada Pension Plan (CPP) during their meeting this week.
Here are five things for advisors to share with clients:
1) A new mechanism will be introduced so Canadians who take time out of the workforce to raise children or due to disability don't see a drop in their retirement benefits. The new portion of CPP will have "drop-in" provisions that will assign a higher income for those years and use that to calculate retirement benefits. The Department of Finance Canada defends the use of drop-in provisions because the "enhanced" CPP, as it is known, is based on a fixed, 40-year benefit accrual period making it easier to drop in amounts rather than dropping out years as is the case in the base CPP.
2) For child-rearing, the finance ministers agreed to a formula to drop in the average income over the preceding five-year period before a new parent took time to raise children under age seven. For those with disabilities, the formula agreed to will use 70% of the average earnings in the six years prior to the onset of the disability during the years out of the workforce.
3) Survivor benefits will be paid out to everyone, regardless of age, dependent children or disability. Even those previously denied due to their age would be eligible to re-apply for the benefits when the rules come into effect in 2019. Nor will there be any reductions in benefits for those under age 45. Current recipients will have their benefits automatically bumped up.
4) A lump-sum payment upon a person's death will be set for everyone at $2,500, instead of being calculated based on a deceased's earnings. The Liberals say this will help low-income workers who typically don't receive the maximum benefit. But the value is still below what it was in 1997, one year before it was frozen at $2,500. Had it not been frozen, it might be worth more than double that today.
5) The government says the changes won't require increases in CPP contribution rates. But Canadians will have to wait until next year to find out the actual cost to the CPP balance sheet and the effects on benefits for recipients. The chief actuary will assess the costs and effects of all the measures once the Liberals table the necessary legislative amendments to the CPP.