Enhancements to the CPP are always being suggested, largely to address the fact that fewer Canadians now have workplace pensions. The latest deal made by provincial Finance Ministers in June 2016 will boost CPP income from one quarter of pensionable earnings to one-third. The change will phase in slowly from 2019 to 2025 (when the pensionable earnings target will be $82,700), so it will be a while for these changes to be felt by future retirees.
Of more pressing concern to current retirees, and not addressed – or even on the radar – is the issue of CPP survivor benefits.
As noted in this Globe and Mail article, if you find yourself widowed, you may not get the survivor benefit that you expected.
CPP Survivor Benefits calculation
The amount a person gets depends on both the age of the survivor, past contributions of the deceased, and when CPP benefits started as seen here.
The exact formula used for each personal situation is complicated.
What is not often foreseen is that a CPP pension combined with a survivor benefit is capped at the year’s maximum single benefit ($1,114 per month in 2017). This means that if both spouses were receiving the maximum amount, there will be no survivor benefit.
What could the Survivor Benefit look like
Opponents to the current plan say that the CPP should work like a defined-benefit pension (or even a joint annuity) whereby the survivor receives 60% of the pension amount.
What is not considered is:
- This is not fair and equitable to single retirees.
- The survivor benefit option in pension plans reduces the original payment.
My proposed enhancement
My proposal is to eliminate the:
- Survivor benefit
- Orphan’s benefit
- Death benefit
The CPP survivor benefits calculation would be based on what the employee paid into the plan during their working life, if and when they have started receiving the CPP benefit, and a commuted value based on their actuarial life span – currently the life expectancy for a 65-year-old is 85.3 years.
Employees would have to designate a beneficiary, and the survivor benefit would be paid in a lump sum.
Just like the objections to taking out an annuity, people are afraid that they will not receive the full benefits of money that they have paid in to a fund by dying prematurely. They don’t want to have paid a lot into the plan, only to have it go back into the pot.
I think my proposal seems doable, and fair to all.
Marie Engen is the “Boomer” half of Boomer & Echo. In addition to being co-author of the website, Marie is a fee-only financial planner based in Kelowna, B.C. This article originally ran at the Boomer & Echo site on Feb. 15, 2017 and is republished here with permission.