07/26/2013 05:36 EDT | Updated 09/24/2013 05:12 EDT

How the Government Sneakily Pockets Your Pension

A woman counts $100 Canadian notes/bills before making a large purchase.

I read an article the other day that brought up a problem that sadly, happens more than we think; dying before you collect Canada Pension Plan (CPP) retirement benefits.

Although there were a couple of factual mistakes, the message was clear and correct -- a lot of people contribute a lot of money into CPP and never receive an income payment.

If you happen to contribute the maximum amount for 35 years and then die before you start to collect, the loss to your heirs would be about $475,000 (assuming five per cent annual growth). Is this fair? I don't think so.

Some people may think that it is fair because that's the way pension plans work. If you die, the pension dies with you. That's true, some plans are like that, but in every plan that I've seen it's a choice the plan member opts for. Furthermore, I've never seen a plan that keeps the member's money if they die before they retire.

For those who are fortunate enough to have a defined benefit pension plan (the monthly pension amount is known) you have choices at retirement regarding the type and amount of pension you're going to receive. If death were to occur before the pension commences, your contributions, along with any investment gains, are refunded to your beneficiaries or estate. When you die after the pension payments have commenced, the continuation of those payments would depend on the option you chose at the onset of retirement. In almost all cases, the minimum amount guaranteed to be paid out is the total value of your contributions plus any investment gains.

With CPP there is a death benefit (a one-time payment of $2,500) and there are survivor's benefits, but I don't think $2,500 is sufficient compensation for 35 years of contributions. As far as survivor's benefits are concerned, even if you die and leave a surviving spouse, they may never see a penny of that money.

Let me explain something about CPP survivor's benefits. The current CPP maximum monthly pension amount is $1,012.50 per month. Say you and your significant other both retire at age 65. When one of you predeceases the other, the surviving spouse is not entitled to any of your CPP benefits because the surviving spouse is already at maximum and you can't receive more than maximum. Is that fair?

Here's another thought. Should CPP be seen the same way as Employment Insurance (EI)? Both you and your employer pay into that and in most cases never receive a nickel. It might not seem fair, but I've always seen EI as "insurance" as the name suggests.

Maybe the answer is to change the name of CPP to CPI (Canada Pension Insurance). "Contributions" could then be reclassified as "premiums" and we as the public would no longer be duped into believing it is a fully functioning retirement pension plan.

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