Today, the CPP death benefit is capped at $2,500, while the CPP survivor’s benefit for spouses and common-law partners is subject to a calculation that usually results in a much lower amount.sorbetto/iStockPhoto / Getty Images
This article is part of a new Globe Advisor series, Pensions Unpacked, exploring how workplace pensions fit into retirement strategies, and the technical details and decisions that come with the plans.
A new proposal to give people who die prematurely the money they lost out on by delaying their Canada Pension Plan (CPP) benefits may be gaining traction in Ottawa.
The proposal, called the “pension-back” death benefit, recommends paying people and their estates the difference between the cumulative CPP benefits they were eligible for and what they would have received if they’d started claiming them at 60. The death benefit isn’t the entire value of the CPP benefit – only the lost income from delaying benefits.
It’s a “money back” guarantee that gives Canadians who delay taking their CPP benefits the same amount of money in the case of early death, says Bonnie-Jeanne MacDonald, director of financial security research at Toronto Metropolitan University’s National Institute on Ageing (NIA), who came up with the idea.
The proposal was published in a report Ms. MacDonald co-authored late last year as part of a series of research papers on the CPP that examined why the majority of Canadians choose to take their CPP benefits at 60, even when they know they’ll get more if they wait until 65 or even 70.
“For those who can afford to wait, the main reason for early claiming is fear of dying prematurely and ‘losing out,’ distracting the retiree from the greater risk of underfunding a long retirement,” Ms. MacDonald says.
Her report offers an example of someone who would receive $1,000 a month in CPP benefits at 65, or a reduced benefit of $640 at 60. If they died at 65 without claiming CPP benefits, their pension-back death benefit would be $38,400, or $640 a month over five years.
Today, the CPP death benefit is capped at $2,500, while the CPP survivor’s benefit for spouses and common-law partners is subject to a calculation that usually results in a much lower amount, especially if the surviving spouse starts taking their CPP benefits.
Ms. MacDonald said the pension-back death benefit solution is based on a six-year research program that includes insights from hundreds of government and academic sources and experts, including Canada’s former chief actuary Jean-Claude Ménard.
She believes the solution crosses political lines partly because it would benefit lower-income Canadians, who tend to die earlier, and it could be done at a low cost to governments through minor adjustments to early and late retirement age factors.
“The idea has proven [to be a] success in private annuity and pension markets to enhance retirement income security by reducing the ‘mental gamble’ of delaying benefits,” Ms. MacDonald says.
The pension-back death benefit report was reviewed with some interest within the civil service when it was released in late December, according to Gabrielle Gallant, the NIA’s director of policy.
She says it has also been well received by political parties.
Ms. Gallant argues the proposal is timely given that Ottawa’s three-year actuarial review process, which includes CPP considerations, has just restarted.
“It couldn’t be a more ideal time for governments and political parties to be considering this idea,” she says, noting the next report is expected to be in early 2028.
Ms. MacDonald says the pension-back death benefit would be relatively easy to administer. Instead of increasing minimum contribution requirements or reducing the basic amount of benefit payable at 65, she suggests small changes could be made to the age adjustment factors, which are outlined in detail in her paper (see page 29).
“What we’re proposing is a powerful yet fiscally responsible way to improve Canadian seniors’ lifetime retirement income: a strategically designed CPP death benefit,” Ms. MacDonald says, arguing the proposal could generate broad public appeal and strengthen Canada’s retirement system.
Moshe Arye Milevsky, finance professor and CIT chair in financial services with the Schulich School of Business at York University in Toronto, says the pension-back death benefit is a good idea on paper, but it’s hard to know whether it would lead to more people delaying CPP benefits.
“There’s no evidence to suggest that a pension system somewhere around the world that didn’t have a death benefit that then implemented a death benefit suddenly saw people taking it later,” he says.
Still, he points to data showing the vast majority of people who buy annuities want a death benefit.
“So, maybe the next step is to do some sort of experimental stage in which a small subset of Canadians are given the option to do this as a special deal to see if it makes a difference,” he says.
But before that, Mr. Milevsky says Canada’s chief actuary would need to run the numbers.
He also says the insurance industry would likely lobby against such a change, given that it might be seen as competition for annuity products.
“But let’s get it costed out, and let’s see if it truly works,” he says, adding it could be one of a list of proposals to improve the CPP.