By Julie Cazzin, with John DeGoey
Feb. 22, 2022
Q: What happens if I pass away before — or just after — starting to collect my Canada Pension Plan (CPP)? And how is it distributed to seniors? As a new senior, I see so many irregularities with CPP distributions. The assumption that all boomers like me are wealthy is an erroneous one. Many of us don’t have any other pension income. And I believe that single seniors especially don’t receive money from CPP in proportion to what couples receive. Any transparency you can shed on this issue would be appreciated. — Maria
FP Answers: Maria, you want to know more about how CPP is distributed to seniors, and particularly where contributions go for those who die soon after — or even before — collecting. Such a delicate topic may strike many as being fundamentally unfair. Why spend an entire adult lifetime paying into something only to get little or nothing on the way out?
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Before getting into those thorny areas, it should be noted that most Canadians leave money on the table precisely because they don’t want to feel the pain caused by these circumstances. Many Canadians take CPP on or before their 65th birthday, even though most of them would be better off if they waited as long as possible — meaning until age 70.
Actuaries and aging experts are nearly unanimous in saying that Canadians underestimate their own longevity risk. Indeed, Purpose Investments Inc. recently released a new fund that was engineered and developed precisely because of this challenge.
Two caveats that should be used when discussing CPP are that everyone’s situation is different, and that no one knows when their time will be up. As such, decisions need to be customized to your own circumstances.
Still, the evidence is clear. Most of the time, most people will end up better off if they wait as long as possible before claiming CPP. Research done for the FP Canada Research Foundation emphatically demonstrates this point. However, getting people to act in their own best interest is challenging when the prospect of so-called free money is dangled in front of them.
The above points needed to be clearly stated before answering your question because context is important. The premise of the question is fair, but it’s not all that representative of the broader population.
Despite concerns about premature death, most Canadians live longer than they think they will. As a monthly taxable benefit used to supplement retirement income, CPP is a vital part of their retirement plans. Recent changes allow the plan to ultimately pay up to one-third of your pre-retirement income. The previous target was one-quarter.
Still, the assumption that nearly all retiring boomers are wealthy is, indeed, incorrect. For 2019, the maximum monthly CPP amount you could receive as a new recipient at age 65 is $1,154.58. The average monthly amount, however, is only $679.16. Your situation (contribution history) will determine how much you’ll receive.
If you pass away before collecting or soon after starting CPP, the money contributed remains part of the plan’s total pool of capital. If you have a surviving spouse, that person is entitled to a survivor’s benefit equal to 60 per cent of your entitlement if they are 65 or older. If they are less than 65, they will receive a flat rate portion plus 37.5 per cent of the contributor’s retirement pension, provided the survivor is not receiving other CPP benefits.
Many considerations impact the payments you can receive. For example, people who were long-time single parents or who took time out of the workforce to raise children will have their payment adjusted.
But the main message is that Canadians should truly think about what their needs are likely to be in their autumn years. Too often, people take any pension money as soon as it’s available to them, even though they would likely receive far more if they resisted the natural temptation and waited until there was a genuine need instead.
All told, Canada’s public pension system is one of the best on the planet. It is well run and has been deemed to be sustainable for many generations going forward. It is not going to run out of money and will not be readjusted to lower benefits. It is a prudent, measured program that generally does a good job of maintaining dignity and a minimum standard of living for ordinary Canadians.
