Only a tiny fraction of Canadian seniors are deferring their public retirement benefits, a decision that could cost each of them tens of thousands of dollars in foregone payments, according to data provided to The Globe and Mail.
Canadians have been able to delay the start of Canada Pension Plan (CPP) benefits since 1987, and since mid-2013, Old Age Security (OAS) payments as well. Delaying those benefits adds thousands of dollars in annual payments. For middle-income seniors who live well into their 80s, the decision to defer could add up to tens of thousands of extra dollars.
CPP benefits increase by 0.7 per cent for each month of deferral after age 65, hitting a maximum increase of 42 per cent at age 70. (CPP payments are reduced if someone opts to start receiving them between the ages of 60 and 64.) Deferring the OAS is slightly less lucrative, with those payments rising by 0.6 per cent for each month of deferral, to a maximum of 36 per cent at age 70. A person who was eligible for the maximum regular payments under CPP and OAS and who opted for a full five years of deferral would receive an additional $10,168 a year excluding clawbacks, based on current rates.
The Harper government introduced OAS deferrals in its 2012 budget as one of several measures, including a gradual increase in the mandatory retirement age, aimed at coping with the aging of the Canadian work force. The Trudeau government cancelled the move toward a higher retirement age, but kept the deferral plan in place.
An individual’s decision to defer comes down to a bet on how long a senior expects to live. Die early, in your 70s, and you will end up being shortchanged since the higher deferred payments won’t yet have made up for the lack of benefits for five years. Live into your 80s or even 90s, however, and the bet pays off handsomely.
“Most people are better off waiting until age 70,” says Fred Vettese, a former chief actuary of Morneau Shepell and the author of Retirement Income for Life.
But only a handful of seniors are taking advantage of that seemingly free money, according to exclusive data from Employment and Social Development Canada (ESDC). As the chart below shows, just 11 per cent of seniors born from 1945 to 1950 opted to defer their CPP benefits, and only 4 per cent delayed the start of payments for the full five years.
The picture is even more lopsided for OAS payments. For that program, virtually all seniors start receiving benefits upon turning 65, indicate the data from ESDC for seniors born from 1949 to 1951. (The data are limited to those years because seniors born in 1949 are the first cohort fully able to take advantage of the deferral option, and those born in 1950 and 1951 now have also turned 70.)
As this second chart shows, few have chosen deferral, with less than 1 per cent opting for the full five-year period.
And the average length of deferral has declined for the younger seniors within that group. For those born in 1949, the average deferral period was 31 months. That fell to 29 months for seniors born in 1950 and to 27 months for those born in 1951.
There are some solid reasons to decide against deferring benefits, said Mr. Vettese. The most obvious: simply not being able to afford the delay. For poorer seniors, the arrival of CPP and OAS benefits can represent a financial lifeline. Indeed, poverty rates for Canadians fall as they enter their 60s, chiefly because of those payments.
Conversely, well-off retirees may be indifferent to the deferral of OAS payments, which are reduced as income rises and disappear altogether once an individual has more than $128,149 in income.
Another clear justification for immediate payments would be a shortened life expectancy. Simply put, if you expect to die in your 60s or 70s, deferral is not a prudent choice.
Lastly, seniors who already qualify for the maximum CPP pension and who are continuing to work will likely want to opt to start receiving benefits at age 65, Mr. Vettese says. Otherwise, such a person would be required to continue to make CPP contributions, even though it would not increase their eventual benefits under that program.
But for seniors who are retired, and in good physical and financial health, deferral of OAS and CPP benefits is the wiser choice, Mr. Vettese said, estimating that nine in 10 Canadians fit that description. Yet the split is in the opposite direction.
One reason for that discrepancy is that deferring public pension income requires a senior to spend private savings in the early years of retirement. That might seem counterintuitive, but it makes sense because the government payments are free from risk, and rise over time. (CPP, Mr. Vettese notes, rises with average earnings, typically outpacing inflation.)
A lack of faith in the sustainability of the CPP and OAS could be another factor, he says. In fact, the CPP is fully solvent, and the federal government’s finances are deemed sustainable even with rising OAS outlays, according to the Parliamentary Budget Officer.
Some people may simply not be able to shake off the allure of immediate payments, he says, adding there could also be a lack of awareness. A 2018 survey by ESDC validates that thought: Only 36 per cent of respondents correctly answered that it is possible to delay CPP benefits, and that they increase for each month of delay. For the OAS program, just 17 per cent of respondents picked the correct answer. (The survey recruited participants using a random pop-up panel on the Canada.ca website; 3,834 people between the ages of 40 and 64 took part.)
A 2020 ESDC assessment of the OAS program concluded that more needed to be done to increase awareness. But increasing the value of deferral, particularly for the CPP, would be another way of encouraging more seniors to take advantage of that option, Luc Godbout, the research chair in taxation and public finance at the University of Sherbrooke, said in an e-mail.
Kevin Page, president and chief executive of the Institute of Fiscal Studies and Democracy at the University of Ottawa, and a former parliamentary budget officer, said the deferral of OAS and CPP payments benefit both individuals and the national economy. Seniors who continue to work buttress the work force and continue to pay taxes, offsetting whatever additional benefits they receive in later years, he noted.
Participation rates from older Canadians has risen in recent years, Mr. Page said, but the Canadian economy, already beset by labour shortages, will need that trend to continue.
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