Canada Pension Plan changes
By Diana McLaren • Bankrate.com

The notion of "Freedom 55" has gone the way of declining stock portfolios, with today's workers wondering not only when, but if, they'll ever reach a life free of long commutes and tight deadlines.

As fewer people look to an early retirement, the idea of working longer and engaging in part-time employment is taking hold. Coupled with this sobering realization is the added insecurity regarding the stability of private benefits thanks to recent corporate bankruptcies and pension concessions by workers.

On top of all this, the federal government recently announced revisions to the Canada Pension Plan, or CPP, that encourage workers to take their pensions later, rather than sooner, and continue to work even after they begin receiving CPP payments.

So what does all this mean for workers?

"The government is trying to eliminate the incentive in the current system to retire early," says Malcolm Hamilton, a pension expert in the Toronto office of Mercer, a global consulting company.

Contrary to media reports calling the CPP changes as having major significance, Hamilton says they're more of a rebalancing of the system to make what he calls a "neutral reduction in benefits."

In other words, incentives or penalties shouldn't cost the system anything, and right now, too much is weighted toward taking CPP early.

It pays to wait
Currently, Canadian workers can claim their full CPP payout at age 65 but may start taking the pension as early as age 60. There is a 0.5 per cent reduction for each month the CPP is taken before age 65 and a 0.5 per cent increase for each month it is taken after 65, up to age 70. 

This translates into a 30 per cent reduction if CPP is taken at age 60 or a corresponding increase of 30 per cent if the pension is taken at age 70.

Under the new system, there will be a larger reduction before age 65 (0.6 per cent per month) and a higher increase (0.7 per cent per month) if the pension is claimed after age 65. The reductions will be phased in over a five-year period starting in 2012, while the increase will be phased in over three years beginning in 2011.

The Department of Finance illustrates the impact of this change with a scenario of someone retiring at age 65 in 2013 with full CPP benefits. This would amount to $12,820 per year. However, if the individual waits one year to collect the pension, at age 66, it would increase by 8.4 per cent to $13,897.

Further increases would occur for every year beyond 65, up to age 70, that the pension is taken.