How the pandemic could cost you some of your CPP retirement benefits

Job losses as a result of the economic shutdown to fight COVID-19 could cost people thousands of dollars in lifetime Canada Pension Plan retirement benefits.

If you’re not working, you and your employer aren’t making CPP contributions on your behalf. Those lost payments could result in a lower monthly CPP payment when you retire. As is proving to be the rule in the pandemic, middle- and lower-income people are more vulnerable than those with a higher income.

Rightfully, everyone’s attention right now is focused on helping people survive the economic damage caused by the pandemic without accumulating big debts or defaulting on existing debt. That’s the point of the Canada Emergency Response Benefit, which pays $2,000 every four weeks.

But it’s also vital to start tallying the long-term effects of the pandemic on our personal finances. Retirement is a good starting point. People who lost work as a result of COVID-19 aren’t contributing to their registered retirement savings plans and tax-free savings accounts, which seems obvious and can perhaps be mitigated with higher contribution levels in the future.

The impact of job loss on CPP retirement benefits is invisible, though. “The only way you’d know about it would be if you’re one of those people who checks your My Service Canada account monthly, or even yearly, to see how much your estimated CPP is,” said Doug Runchey of DR Pensions Consulting.

Mr. Runchey recently calculated that one year’s maximum CPP contributions if you retire with the maximum retirement benefit at the age of 65 is worth $30.15 a month (this excludes CPP enhancements that began a phase-in period in 2019). If a job loss cuts your income in 2020 and you make only half the maximum CPP contribution, you could lose out on $15.07 a month in future benefits.

Some background: The period over which you can contribute to the CPP runs from the age of 18 to 65, or 47 years. You can drop your eight worst earning years (not including child-rearing years), which means it’s your 39 best salary years that drive the amount you get when you retire. Just as an aside, the CPP post-retirement benefit allows you to earn additional retirement benefits if you work from the age of 60 to 70.

Something else you should know about the calculation of CPP retirement benefits is the impact of the yearly maximum pensionable amount (YMPE), which is the maximum amount of salary on which you pay CPP premiums. This year’s YMPE is $58,700 – you need to earn at least this much in 2020 to have your CPP contributions count toward a maximum retirement benefit if you retire at 65.

Someone with a salary of $150,000 who lost their job in March and doesn’t work again until Sept. 30 would be fine as far as CPP goes. Their earnings for six total months of employment would be $75,000, enough to push them into maximum CPP contribution territory.

Someone earning $59,000 who worked half the year would have earnings of $29,500, or roughly half the YMPE. Mr. Runchey said the cost in lost monthly retirement benefits if the CPP is started at 65 would be about $15.

This amount sounds modest, but it adds up over a lifetime. By the age of 90, $15 a month totals $4,500.

The year of the pandemic could be one of your eight dropped years, which means it wouldn’t hurt your eventual CPP retirement benefit. But it’s not unusual for people to have already accumulated eight low-income years by the time they reach their peak years in the work force. For example, you may have earned only a part-time income or modest income through your 20s as you finished your education and looked for a full-time job.

Lost CPP retirement benefits are not a retirement-killer all by themselves, but there’s a cumulative negative effect if an individual is unable to save for retirement as a result of the pandemic or must draw from savings to stay solvent.

Barring a big improvement in your financial position after the pandemic, the best solution to lost retirement savings is to work longer and retire later. Expect the world of the 2040s and 2050s to have a lot more working people age 65 and older.