If you are over 65 and were planning on starting your CPP pension in early 2023, you will probably be better off starting it instead in December, 2022. This is because of yet another quirk in the Canada Pension Plan that only reveals itself in years like 2022, when price inflation is higher than wage inflation. (My thanks to a reader for pointing this out to me.)
To illustrate the problem and the opportunity, consider Janice. She plans to start her CPP pension in April, 2023, the month after her 68th birthday. Because of her contribution record, she is entitled to 90 per cent of the maximum CPP pension. This works out to $17,415 a year if she starts her pension in April, 2023 – assuming the 2023 CPP earnings ceiling will be $66,500.
If this amount looks high, it is because it includes an actuarial adjustment, which is a boost in pension that the CPP gives to encourage people to postpone the start date of their pension. So in the case of Janice, who would be starting her CPP pension 36 months after turning 65, the actuarial adjustment would be 25.2 per cent.
But what if Janice decided to start her CPP in December, 2022, instead? In that case, the actuarial adjustment would be only 22.4 per cent because it is just 32 months after she turned 65. As a result, her starting CPP pension would be $16,441 versus the $17,415 calculated above. This is where the quirk comes into play.
It is customary in most pension plans that provide inflation-based increases to grant only a proportional increase in the year after the pension starts. For instance, if the full year’s increase is 6.3 per cent, the increase for someone who started their pension halfway through the previous year would be 3.15 per cent. The Canada Pension Plan is different. It provides the full year’s increase effective Jan. 1 – even if the pension was paid for just one month in the prior year.
In Janice’s case, her CPP pension of $16,441 would therefore be increased on Jan. 1, 2023, by the full inflation adjustment for 2022, which I’m estimating will be 6.3 per cent. This puts Janice’s pension at $17,477 as of Jan. 1, 2023. Yes, that is more than if she had waited until April, 2023. By starting her pension four months sooner, Janice gets four extra months of payments (worth $5,738) plus she gets a slightly higher CPP pension for the rest of her life. If that isn’t enough, starting earlier means she won’t have to contribute to CPP in 2023 if she still has employment earnings.
A few caveats. Starting CPP in December works best for people who a) are over 65, and b) were planning to start their CPP pensions in the first six months of 2023 anyway. Second, it may work this one time only since 2022 is an anomaly given the unusually high inflation rate. Third, these calculations ignore the changes to the CPP pension and contribution formulae that started to be implemented in 2019, but their effect should be negligible for someone like Janice.
Finally, my advice to defer CPP until age 70 is still the best course for most people in most years. Doing so usually provides the highest actuarial present value and maximizes the amount of inflation-protected pension that the average Canadian will receive. It might be only this one time that you will want to start your CPP pension a few months earlier.
Frederick Vettese is former chief actuary of Morneau Shepell (LifeWorks) and author of Retirement Income for Life.