A proposal gaining attention in Ottawa could potentially offer a significant change to the Canada Pension Plan (CPP) system.
Known as the “pension-back” death benefit, this initiative seeks to compensate individuals and their estates for the money lost when they delayed their CPP benefits but passed away before receiving the full amount.
This proposal aims to provide a “money-back” guarantee, ensuring that Canadians who defer their CPP benefits would receive a fairer outcome if they die prematurely.
What is the Pension-Back Death Benefit?
The pension-back death benefit is designed to pay out the difference between the CPP benefits an individual would have received if they started their benefits at age 60, versus the benefits they would get by waiting until they reached 65 or 70.
The benefit will not cover the entire value of the CPP benefits; rather, it addresses the lost income due to the delay in claiming.
This concept, first introduced by Bonnie-Jeanne MacDonald, the director of financial security research at Toronto Metropolitan University’s National Institute on Ageing (NIA), proposes that this benefit can address the concern that Canadians who delay claiming their benefits may face financial loss if they die prematurely.
According to MacDonald, it could provide a safety net for those who delay CPP out of fear of “losing out” in the event of an early death.
Key Features of the Proposal
The pension-back death benefit will compensate people or their estates for the missed CPP payments that would have been available had they started taking benefits earlier.
For example, consider someone who is eligible for $1,000 per month at age 65, but decides to start taking their benefits at 60 for a reduced $640 monthly payment.
If this person dies at age 65 without ever having claimed the benefits, their estate would receive a pension-back death benefit of $38,400 (or $640 a month for five years).
| Scenario | CPP at 60 | CPP at 65 | Death Benefit (Lost Income) |
|---|---|---|---|
| Monthly Benefit | $640 | $1,000 | $640/month for 5 years |
| Total Value of Death Benefit | $38,400 | $60,000 | $38,400 |
Why is This Proposal Gaining Attention?
The proposal addresses a common concern: early death for those who decide to delay taking CPP benefits. Many Canadians choose to claim at age 60, even when they know they would receive a larger monthly amount if they wait until 65 or 70.
Fear of losing out on potential benefits if they die prematurely is a major driver of this decision, despite the long-term risk of running out of money during retirement.
Bonnie-Jeanne MacDonald’s research report from late last year highlights the psychological factors at play.
The fear of losing the CPP benefits, combined with uncertainty about the future, often leads retirees to take their benefits earlier than they should, which could affect their long-term retirement security.
Current CPP Death Benefit and Its Limitations
At present, the CPP death benefit is capped at just $2,500, a far cry from what some might need to compensate for the potential loss of years of delayed benefits.
Additionally, the CPP survivor’s benefit for spouses and common-law partners often results in a much lower payout, especially if the surviving spouse begins collecting their own benefits early.
MacDonald’s proposed pension-back death benefit would offer a solution that could align the benefits more closely with the needs of lower-income Canadians, who often experience earlier death.
Furthermore, it could be implemented with minimal cost to the government, requiring only slight adjustments to the early and late retirement age factors.
Political and Public Reception
Since the pension-back death benefit proposal was published, it has garnered significant interest. The civil service and political parties have shown positive reactions, particularly since Ottawa’s three-year actuarial review process of the CPP system has just resumed.
This timing is ideal for introducing such a proposal, which is likely to appeal across political lines due to its potential to benefit those who are at greater risk of dying early.
Expert Opinions on the Proposal
Some experts, such as Moshe Arye Milevsky, finance professor at Schulich School of Business, have expressed cautious optimism about the idea.
While the concept appears promising on paper, Milevsky points out that there’s no substantial evidence to suggest that the introduction of a pension-back death benefit would necessarily lead to people delaying their CPP claims.
However, data from annuity markets indicates that death benefits are highly valued by those who purchase annuities, suggesting that such a benefit could resonate with the public.
Milevsky also emphasizes that this proposal would require an official actuarial analysis by Canada’s chief actuary to determine its feasibility and cost-effectiveness. The insurance industry may oppose the idea, as it could pose competition to existing annuity products.
The pension-back death benefit proposal offers a balanced approach to improving the CPP system. It has the potential to provide fair compensation for Canadians who choose to delay their benefits but face premature death, ensuring they are not penalized for their decisions.
With minimal adjustments and broad public appeal, this proposal could enhance the financial security of seniors and strengthen Canada’s retirement system.
FAQs
What is the pension-back death benefit?
The pension-back death benefit compensates individuals or their estates for the lost income from delayed CPP benefits in the event of premature death.
How does the pension-back death benefit work?
It pays the difference between the CPP benefits one would have received if they claimed at age 60 versus the amount received by waiting until 65 or 70.
What are the potential benefits of the proposal?
The proposal could provide additional financial security for Canadians who delay CPP benefits but pass away early, while also supporting lower-income seniors.