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CPP Survivor's Benefit calculation methodology somewhat murky, to say the least
June 20, 2019
11:35 am
Doug
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Apologies for the relative brevity of this post as I don't have time, or much to say, really, beyond what's in the article, but saw this really interesting CBC News story which seems to do a good job of explaining the CPP survivor's benefit calculation, which is at least somewhat murky as I'm sure many on here (including @Loonie) can attest, in a number of scenarios.

Link: https://www.cbc.ca/news/business/cpp-survivor-benefit-shock-1.5170879

I may add my own comments in a few days after people if responded to the article with their own comments, stories, etc.

Props to Achieva Financial's Twitter feed for spotlighting the article.

Cheers,
Doug

June 20, 2019
2:31 pm
Loonie
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I have mentioned this issue before in this forum but there was little interest shown in it.

Unfortunately, this article does little to clarify the complex situation, but it does at least give notice that there is a problem. In a way, I don't blame the journalist because the problem is so complex that I doubt very much that she could penetrate it. I have tried, and I can't get to the bottom of it myself.

Basically, what you need to know is that Doug Runchey is correct. Unless surviving spouse was born before a certain year, I think it's 1934, certainly no later than 1936, you should ignore all those projections that you get in your periodic statements from CPP because they are completely misleading. You will never get 60%, and you will likely get substantially less.
After quite a bit of time on the phone and requests for something in writing since it could not be determined by phone, we can't even get Service Canada to tell us what spouse's CPP would have been if applied for at age 65, which is the lynchpin of the calculation. They only calculate this after the person dies, it seems. Only if you'd received one of their statements in that exact month following 65th birthday would you know for sure. We are hoping that we might be able to calculate it retroactively once spouse starts receiving benefits at age 70. Service Canada can't tell us what that figure will be, even though all the info is already available to them for the basic pension, and has been for quite some time. I can appreciate that they may be uncertain about the PRB but the PRB has nothing to do with the Survivor Benefit anyway, and no excuse for not knowing the basic. We have asked specifically what the CPP benefit would have been at age 65. No matter how friendly they are or how much they want to help, they simply don't have the information.

For anyone who really wants to know what to expect, your best bet may be to pay Doug Runchey to figure it out for you. I believe he charges about $100. He is retired from working for the government in that department and understands how it works. I know that most accountants are flummoxed by it. I've read the legislation and find it impenetrable. Perhaps Norman1 could figure it out. Maybe try your MP's constituency office - this question should keep them busy for a while!

Daryl Diamond, in the second edition of his book, Your Retirement Income Blueprint (2014), noted the ominous nature of the change in Survivor Benefits from the standard 60% which we were all told for so many years that we would receive upon death of spouse. He notes that it's the first time such a benefit has been decreased.
This change happened when they rejigged the CPP contributions. I forget when it was exactly, but must have been between 2010 and 2014, as Diamond's first edition was published in 2011. Prior to that, everyone would get 60% as promised, to maximum of a single person's pension. Now, you don't even get that. CPP and Service Canada have made it very difficult for people to realize what they're in for. If they knew, they might try to effect change.
If you are concerned, complain to your MP.
I still have the documents that promised me 60%, although spouse's have been lost. I hope somebody finds a way to take them to court. Should be a class action suit as the people who need the benefit won't be able to pay for the lawyers to do it. However, I don't know if it would be considered a sound case or not as I am not a lawyer. I'd certainly join any class action though. In my language, I'd call it breach of promise.

June 20, 2019
6:18 pm
Norman1
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Doug Runchey provides details of the exact calculation in RetireHappy.ca: Understanding the CPP survivor’s pension.

The survivour pension is 60% of the "deceased's pension", reduced so that the survivor pension combined with the "survivour's retirement pension" is no more than the CPP maximum.

The complication is the "deceased pension" is the age 65 pension. It is not necessarily the actual pension the deceased was receiving which was adjusted by the number of months before/after age 65 the actual pension started.

As well, the "survivour's retirement pension" is the survivor's age 65 pension and not necessarily the survivour's actual retirement pension that was adjusted by the number of months before/after age 65 it started.

June 20, 2019
6:56 pm
Doug
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Norman1 said
Doug Runchey provides details of the exact calculation in RetireHappy.ca: Understanding the CPP survivor’s pension.

The survivour pension is 60% of the "deceased's pension", reduced so that the survivor pension combined with the "survivour's retirement pension" is no more than the CPP maximum.

The complication is the "deceased pension" is the age 65 pension. It is not necessarily the actual pension the deceased was receiving which was adjusted by the number of months before/after age 65 the actual pension started.

As well, the "survivour's retirement pension" is the survivor's age 65 pension and not necessarily the survivour's actual retirement pension that was adjusted by the number of months before/after age 65 it started.  

That's what it sounded like to me. So if surviving spouse happens to be receiving their own CPP pension at the maximum level, they'd receive no survivor benefit because the combined CPP/survivor pension benefit is subject to the maximum CPP benefit limit?

Cheers,
Doug

June 20, 2019
7:07 pm
GICinvestor
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That's what it sounded like to me. So if surviving spouse happens to be receiving their own CPP pension at the maximum level, they'd receive no survivor benefit because the combined CPP/survivor pension benefit is subject to the maximum CPP benefit limit?

I worked with a fellow, he retired and then worked the phones for CRA. He told me the same, the survivor will never get any more than a full CPP pension. Also if you are married 3 times and each of the 3 spouses died the survivor only receives the additional benefit from the best of the 3.

June 20, 2019
7:17 pm
Loonie
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It's a much bigger hit than just not getting more than one person's maximum pension at age 65. That's not the real scandal and is the least of it.

If both partners are receiving near-maximum CPP, then the Survivor Benefit won't be a significant concern other than the fact that survivor won't get any benefit to speak of.
Where it matters most is where one partner has a much lower CPP pension, typically the woman, who is then widowed. As I recall, the average CPP pension is somewhere around 600/month, well below the max.
There were a couple of stories about this, with specific frightening examples, in the paper a year or two ago. I think they were in the Toronto Star but not sure. I thought I'd posted links to them, but can no longer find them or the thread.

I have, in the past, read the entirety of Runchey's postings, and it's very clear that it's much worse. And, even having done that, I was not able to follow the calculation. I might have if I'd taken more time - a day or so!

June 20, 2019
9:11 pm
Rick
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Norman1 said
The survivour pension is 60% of the "deceased's pension", reduced so that the survivor pension combined with the "survivour's retirement pension" is no more than the CPP maximum.

The complication is the "deceased pension" is the age 65 pension. It is not necessarily the actual pension the deceased was receiving which was adjusted by the number of months before/after age 65 the actual pension started.

As well, the "survivour's retirement pension" is the survivor's age 65 pension and not necessarily the survivour's actual retirement pension that was adjusted by the number of months before/after age 65 it started.  

SOUNDS like another incentive to take CPP @ 60??

June 21, 2019
8:42 pm
Norman1
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Rick said

SOUNDS like another incentive to take CPP @ 60??  

I'm not sure it makes any difference. The starting amount of the survivour pension is based on the hypothetical age 65 CPP retirement pension of the deceased. So, it doesn't matter whether the deceased had actually started collecting his/her CPP retirement pension at age 60, 65, or 70.

June 21, 2019
9:55 pm
Norman1
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Loonie said

Where it matters most is where one partner has a much lower CPP pension, typically the woman, who is then widowed. As I recall, the average CPP pension is somewhere around 600/month, well below the max.

There were a couple of stories about this, with specific frightening examples, in the paper a year or two ago. I think they were in the Toronto Star but not sure. I thought I'd posted links to them, but can no longer find them or the thread.

Perhaps Toronto Star (Sun., March 3, 2013): This retiree’s $22.75 Canada Pension Plan shock is one of the stories.

The problem with the article is the survivor was receiving a retirement pension that is quite close to the CPP maximum payout. That's because he started his pension at age 63 and not age 65. So, there was around a 0.6% x 2 x 12 = 14.4% reduction in both his retirement pension and his CPP maximum.

He was receiving $883/month the previous year. We don't know exactly how many months early he started his CPP. But, he would have been receiving around $883 / (1 - 0.144) = $1,031.54 instead had he started at age 65.

That is more than the 2013 maximum retirement payout of $1,012.50/month. So, he definitely did not start 24 months early, but something between 12 and 24 months early. Regardless, he was quite close to his CPP maximum and, consequently, only got $22.75/month as the CPP survivour pension from his wife passing away.

June 22, 2019
4:39 pm
Loonie
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Norman's link doesn't work for me. 504 error.
However, I get the drift.

In the examples that I remember reading about, the survivors were women, and they were not receiving anywhere near the maximum, either before or after their spouses died. It came as a great shock to become so impoverished so quickly under the new formula.

As I said earlier, the problem goes beyond not being allowed to exceed the maximum for one person. That part actually makes sense to me.

June 22, 2019
5:49 pm
Doug
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Loonie said
Norman's link doesn't work for me. 504 error.
However, I get the drift.

In the examples that I remember reading about, the survivors were women, and they were not receiving anywhere near the maximum, either before or after their spouses died. It came as a great shock to become so impoverished so quickly under the new formula.

As I said earlier, the problem goes beyond not being allowed to exceed the maximum for one person. That part actually makes sense to me.  

Yeah, it sort of makes sense to me that one's combined regular and survivor CPP benefits shall not exceed the maximum CPP regular benefit amount, inasmuch as that makes sense (unlike Old Age Security, which is paid for by general taxation and other revenues, we, and our employers, pay into CPP). To my way of thinking, the two are separate benefits, with the former reflecting one's CPP entitlement and the latter reflecting the residual entitlement from one's spouse (or highest-earning spousal amount in the case of multiple prior, now deceased, spouses). Why should one be penalized because they earned, on their own, maximum CPP benefits due to them having paid the maximum CPP contributions for at least the required number of years and their part-time spouse passes away they get nothing?

On another matter, I still maintain that the CPP death benefits should be the bigger priority for improvement. I dispute the contention which Loonie has expressed elsewhere that it would cost substantially more to pay a higher death benefit amount (say a 10 year guarantee, at 60-80% of the regular CPP benefits to which one would ordinarily be entitled when they have no spouse). If they have a spouse, provided that the spouse lives for the 10 year guarantee, they shouldn't necessarily receive the higher benefit amount to which their spouse would've received if single since the idea is for the spousal benefits to continue in perpetuity. It's just that single people who perish early get royally screwed under the CPP.

Bottom line, though, what is clear - and I think we can all agree on this - is that the usefulness of the CPP benefits calculator is in absolute question and, perhaps, disrepute. Even Doug Runchey, who worked for Service Canada you mentioned, admits to its inaccuracy. Why they can't spend a few million to contract with an I.T. solutions provider to build them an accurate benefits calculator for the given variables, I don't know. For instance, they could ask such questions like, "To accurately calculate your spousal benefits, what year did your spouse retire? What year did your spouse perish? And, what were your spouse's CPP contributions and yearly maximum pensionable earnings from the first year to which they had CPP insurable earnings and the last year to which they had the same? (See popup window for an explanation of how to enter your spouse's CPP contribution information in the fields below."

Cheers,
Doug

June 22, 2019
7:56 pm
Loonie
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I'm not convinced they want people to be able to do this calculation accurately. THEY can't even figure it out, if you phone and ask, even though they have all the data.
They continue to send out Statements of Contribution, which are misleading in their projections.

Remember, they haven't fixed Phoenix yet, which is urgent, and they've been at that for years!sf-wink

Yes, we will have to disagree on the death benefit. It's currently $2500, just enough for a very no frills burial; it was previously $2000.
Bottom line, CPP is for the living, not the estates of the dead. If you want it to include the dead, then you'll have to either cut back on other benefits or increase premiums, neither of which will be popular.

June 22, 2019
8:10 pm
Doug
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Loonie said
I'm not convinced they want people to be able to do this calculation accurately. THEY can't even figure it out, if you phone and ask, even though they have all the data.
They continue to send out Statements of Contribution, which are misleading in their projections.

Remember, they haven't fixed Phoenix yet, which is urgent, and they've been at that for years!sf-wink

Yes, we will have to disagree on the death benefit. It's currently $2500, just enough for a very no frills burial; it was previously $2000.
Bottom line, CPP is for the living, not the estates of the dead. If you want it to include the dead, then you'll have to either cut back on other benefits or increase premiums, neither of which will be popular.  

Death benefits are provided for by life insurance companies hawking annuities, with only a modest decrease (generally $10-15 per month, based on recent estimates for my 60 year old aunt for a $100,000 life annuity with 20 year guarantee period). With CPP's asset size, I suspect a $5-10 per month cutback in benefits would be reasonable in order to provide for a 20 year guarantee (less if only 10 year guarantee). A person who has paid in all their life should be entitled to receive more than a few months worth of current benefits, as they would with a defined contribution pension plan or a life annuity with guarantee period. It all seems very reasonable and I'm sure people could tolerate a $5.00-$10.00 per month cutback in benefits for the sake of providing, say, a maximum $100,000 death benefit, assuming someone was entitled to the full 10 years as they died at their age 65 and would've received the maximum CPP monthly benefit but yet to apply for their CPP yet and had no spouse. The death benefit would be reduced proportionately to the number of CPP regular benefits received, under my plan, and would be eliminated entirely after the 10- or 20-year guarantee period, or if the person was married and had a surviving spouse would receive spousal benefits (though they could, ideally, receive the remainder of the guarantee period as their deceased spouse's full benefits before being reduced to whatever that spousal benefit calculation was).

For clarity, by "eliminated," let me propose this example: married couple retires at age 65, husband dies at age 67 and received maximum CPP benefits - his surviving spouse would receive his full benefits for the remaining 8 years as part of my revised death benefit/"guarantee" plan - it would replace the existing $2,500 death benefit, not be in addition to. After that 8 years, assuming spouse is still alive, they'd receive 60% of deceased spouse's CPP benefits, subject to maximum CPP benefits. Surviving spouse would receive no further death benefits and, when she passed away, her estate would receive no further death benefit for her death as she'd outlived her own guarantee period.

What do you think of my amended plan?

Cheers,
Doug

June 22, 2019
10:34 pm
Loonie
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I would not accept anything that had a termination or reduction in the survivor benefit.
I don't think you can compare an annuity with a guaranteed term, especially where the 20 year period is less than average life expectancy as with your aunt, to a pension which goes to death and extrapolate from one to the other. The comparison would have to be to a life annuity, at a minimum.

But, beyond that, I disagree with the philosophy behind your idea. In my view, the CPP is intended to contribute to income security for retired persons in such a way that they can get the best return, i.e. the best income. in retirement that is possible considering their contributions. It's not a lot to begin with, but neither are the contributions, relatively speaking. The purpose is not to supplement the estates of the dead who have no dependents, whether they be the single person who dies at 55 or the couple who die together at 55 or anyone who manages to live to 105. They are owed nothing beyond this except perhaps the proper disposal of their remains.
Don't forget too that the employer pays half of the contribution. Your plan would mean that the employers are paying half of the subsidy to the estate, effectively. You would be essentially asking them to provide mandatory life insurance of a sort. That will not fly.

In any event, I'm not really interested in pursuing this further. We are not going to agree on this.

June 23, 2019
8:03 am
Norman1
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I don't think it will only be $10/month to $15/month for the option. That's is too cheap for essentially a declining-balance life insurance policy on a 60 year old.

$100,000 of non-declining 20-year term life insurance for a non-smoking, 60 year old, female from RBC Insurance is around $86/month.

The reason that the cost of the 20-year option on the life annuity is so low is that it is unlikely to kick in for a 60 year old woman. According to Statistics Canada, a 60 year old woman is expected to live another 26.4 years.

The likelihood is further reduced by self selection. A 60 year old woman in so-so health with less than 10 years of life expected will not even apply for a life annuity, even with 20 years of payments guaranteed. In contrast, she would apply for CPP as soon as possible and, if available, take a minimum 20-year of payments option even if it cost $150/month!

June 23, 2019
8:39 am
Norman1
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Loonie said
Norman's link doesn't work for me. 504 error.
However, I get the drift.

The Toronto Star link is working just now. HTTP 504 is "Gateway timeout". That's usually from a web server that's temporarily overwhelmed.

In the examples that I remember reading about, the survivors were women, and they were not receiving anywhere near the maximum, either before or after their spouses died. It came as a great shock to become so impoverished so quickly under the new formula.

As I said earlier, the problem goes beyond not being allowed to exceed the maximum for one person. That part actually makes sense to me.

It isn't clear to me how that would be the case. We'd have to look at such an example to see how it would happen.

My understanding is that if the survivor is nowhere near her CPP maximum, then she would receive close to 60% of the deceased's age 65 CPP retirement pension as a survivor pension.

Is it possible that there was a misunderstanding? Perhaps, her partner had deferred his CPP to age 70 and got ½%/month x 12 months x 5 years = 30% more per month and she was expecting 60% of that enhanced payout. Instead, the 60% is of the non-enhanced age 65 payout. So, instead of a 40% cut, she got a 1 - ((0.6 x 1)/(1.3 x 1)) = 53.8% cut.

I did find a case of a widow who got no CPP survivor pension because of something other requirement. Apparently, survivors under age 35 with no dependent children and not disabled do not qualify for a CPP survivor pension right away: Kitchener widow denied CPP benefits because of age takes feds to appeals tribunal

June 23, 2019
8:55 am
Loonie
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I can only suggest reading through Runchey's blog. There are numerous examples where he helps people calculate what they should expect.

My whole point is that the situation is not what people expect or were promised when they were told for decades that they'd get 60%. I think that most of these people would be content to return to the earlier formula, which was based on applying at 65. The formula has been radically changed.

P.S.
I just noticed that Daryl Diamond has a new, 2019, edition of his book on retirement income planning. I've just ordered it from the library so will see if he can shed any further light. He's the only other person I am aware of who seems to have noticed the problem, as per his 2014 edition where he observed that the new rules mean lower survivor pensions but did not get into details.
The official Summary of the 3rd edition says it covers, in part, "significant changes to the Canada Pension Plan." Let's hope he has something useful to say.

June 27, 2019
6:18 pm
Loonie
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I've now looked at both the 2014 and 2019 editions of Daryl Diamond's books, Your Retirement Blueprint. I didn't find anything particularly useful in either on the subject of CPP Survivor Benefit.
My memory was not completely reliable.
His issue with decreasing benefits was over the mandatory contributions to PRB if you retire before 65 and continue some amount of employment (and, I would add, between 65 and 70 if you decide to postpone CPP to age 70), By requiring this between 60 an 65, the income during that period is reduced. I would add that it's worse than that since there is no Survivor Benefit to the PRB whatsoever. Apart from the new formula as discussed above, this is another way in which the Survivor Benefit is diminished.
Diamond feels that recipients age 60-65 should have been grandfathered, and I agree. There is nothing more disconcerting that having your planning efforts pulled out from under you by arbitrary changes, especially those made in your retirement years.

I didn't notice any significant new content in the 2019 edition, just some updates in figures to bring it up to 2018.

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