Jan. 3, 2019
By now, Canadians may have heard that there’s a big financial advantage to delaying Canada Pension Plan (CPP) benefits. The standard figure cited for delaying CPP to the age of 70 is that it increases benefits to 142 per cent of what they would be at 65.
In fact, my own research shows it would bring your benefits to closer to 150 per cent – and nearly 250 per cent of what they would be at the age of 60. Delaying the Quebec Pension Plan (QPP) also offers the same advantages.
THE MATH BEHIND THE STRATEGY
At 70, the calculation of how much CPP a person gets is based on 142 per cent of a complicated calculation of average Canadian earnings, known as the Maximum Pensionable Earnings Average, which increases with the compounding of inflation and wage growth over those five years – from 65 to 70. Assuming that wages increase by 1.1 per cent ahead of inflation, following what the Chief Actuary of Canada thinks, then that 142 per cent would grow by 1.1 per cent over inflation each year, for five years, to reach about 150 per cent.
What’s more, any “zero” earning years from the age of 65 onward won’t affect the benefit calculation.
RETIREMENT FINANCIAL RISK RE-EXPLAINED
Unlike personal savings, CPP benefits provide a predictable pension. Even if financial markets perform poorly, inflation is high or you live longer than you expect, you can’t outlive your CPP.
One way to appreciate the value of this financial security is to calculate what the retail market price would be. In delaying CPP by five years (from 65 to 70), you are “purchasing” an additional 50 per cent of the CPP benefits at the “cost” of five years of forfeited CPP payments. It would currently cost a 70-year-old man 64 per cent more in the private market to purchase an annuity equal to that provided by CPP. For a woman, the cost is 84-per-cent higher.
If this cost/benefit calculation didn’t capture your attention, consider the financial risk by visualizing your future self. You might want the money now – but you also don’t like the idea of being old and vulnerable.
Imagine you’re among the two-thirds of Canadians who live past the age of 85, possibly with deteriorated health, as more than two-thirds of Canadians are at that age. With a CPP maximum of $13,600 a year, choosing to delay CPP benefits could mean getting up to $6,800 more in secure income each year, which increases with inflation. This reliable extra income can be essential to cover supplemental care, above and beyond the limited government benefits available.
Keep in mind that, at 85, average life expectancy is another eight years. If invested appropriately, could those original five years of forfeited CPP payments have delivered the same level of additional income over such a period? Yes, but you’d need an annual investment return of 9 per cent, after investment fees.
SPREAD THE WORD
If you’re someone who started taking CPP early and perhaps shouldn’t have, you’re not alone. The CPP is Canada’s second most complicated system – next to our income tax system, in which paid professionals normally take care of the decision-making.
A forthcoming research report for the National Institute on Ageing I have conducted with the Financial Planning Foundation will offer greater deeper insights into deciding when to begin collecting CPP.
There are situations in which taking CPP early is beneficial – for example, if you’re a low-income earner or have a medical condition that suggests a shorter life span. But for most, delaying CPP (or QPP) benefits is the cheapest and safest approach to maintaining secure income over the longer lives that may be in store for Canadian seniors. Be sure to tell your friends and family about this important and useful strategy to make their money go further.
Bonnie-Jeanne MacDonald, PhD FSA ACIA, is the Director of Financial Security Research at the National Institute on Ageing (NIA) at Ryerson University, Fellow of the Society of Actuaries, Associate of the Canadian Institute of Actuaries and resident scholar at Eckler Ltd. She lives in Halifax.