Canadian minds are never more closed than when asked to consider delaying the start of CPP retirement benefits.
So a new paper from the C.D. Howe Institute about the benefits of extending maximum deferral of the Canada and Quebec pension plans to age 75 from 70 likely won’t get the attention it deserves. Considered on merit, this paper’s argument should grab the attention of the federal government and people planning their retirement.
Extending the CPP deferral to 75 addresses concerns that middle- and upper-middle income people aren’t saving enough for retirement. By delaying the start of the Canada Pension Plan, you get higher monthly, inflation-protected payments that are immune to financial market ups and downs. Those higher payments can offset low levels of savings in registered retirement savings plans and tax-free savings accounts.
“The further you push CPP out, the more security you get for your old age,” said Bernard Morency, a co-author of the C.D. Howe paper and former executive vice-president of depositors strategy and chief operations officer at the Caisse de dépôt et placement du Québec.
Concern about middle-class Canadians saving enough for retirement led to CPP reforms that will kick in next year and gradually increase benefits over the next several decades. Allowing people to defer CPP until 75 would also help address any middle-class retirement savings shortfall.
The extent to which people ignore the benefit of delaying CPP to even 70 is striking. Almost 320,000 people started CPP retirement benefits last year and just 6,074, or a bit less than 2 per cent, did so at the age of 70. The most popular age by far for starting CPP is 60, which is the earliest possible age (benefits are reduced if you start before the standard age of 65). A total of 125,452 people started CPP at 60, or almost 40 per cent.
The report shows that maximum CPP/QPP benefits totalled $8,557 last year if taken at age 60, $13,370 if taken at 65 and $18,985 if taken at 70. Expect similar improvements if CPP could be deferred as late as 75.
Mr. Morency said part of the reason why so few people delay CPP is that the payback isn’t well understood. There’s also an emotional element – people are more prepared to accept a lesser CPP amount today than a bigger benefit down the road. They fear they won’t get the benefit of the money they contributed if they die young, ignoring the greater risk that they will live longer than expected.
Another objection to taking CPP early that it requires a re-thinking of how to draw from the various sources of retirement income. Traditionally, you’d use a mix of CPP, Old Age Security and income generated by your personal savings such as pensions and RRSPs. The C.D. Howe paper suggests a different approach: Rely exclusively on savings for the first leg of retirement and then let a combination of CPP and OAS take over from savings as the primary source of income.
If you’re in good health, 70 is currently an ideal age to start taking CPP and OAS because both offer the highest possible benefit at that age (OAS starts at 65, but can be delayed as long as five years). Extending CPP deferral to 75 with still higher payouts would make the CPP-OAS combo even more potent as a source of retirement income.
The complication here is that many people will have to dig into their investment principal to cover their expenses before they start taking CPP and OAS. “It’s been proven that what the vast majority of people do is live off their income,” Mr. Morency said. “People are very reluctant to use their capital.”
But here’s the thing about leaving your principal untouched – it can cause you to unnecessarily reduce your spending to conserve money for the future. This might be practical if there was a strong desire to leave money behind after death. But a recent survey of 1,000 Ontario pre-retirees and retirees by the Canadian Institute of Actuaries found that bequests were “generally viewed as fairly unimportant.”
The C.D. Howe report shows you have to live to the age of 84 to make it financially worthwhile to take CPP and OAS at 70, instead of 60 and 65, respectively.
Mr. Morency said a comparable age for taking CPP at 75 wasn’t calculated, but increasing lifespans mean a lot of people will live long enough to make this deferral worthwhile.
As noted in the report, guidelines for financial planners to use on client retirement plans make this point quite well. They recommend clients have enough money to last until the age of 94 at least.