Is there Value in delaying CPP/QPP Benefits?

Happy Retirement

When to claim benefits from the Canada Pension Plan (CPP) – or its Quebec counterpart, the Quebec Pension Plan (QPP) – is an important financial decision for retiring Canadians. With an ageing population and widespread concern that Canadians are inadequately prepared for retirement, it is critical that retiring workers understand how to get the most from the CPP/QPP program. For Canadians in reasonable health who can afford to wait, that often means delaying the start of their CPP/QPP benefits for as long as possible

Canadians are not required to begin receiving CPP/QPP benefits as soon as they retire. Benefits can be taken as early as age 60 or as late as age 70, and the benefit amounts are adjusted according to the age of the individual when they start receiving payments. Indeed, delaying CPP/QPP benefits comes with a sizeable financial advantage, which is conventionally explained as follows:

■ If CPP/QPP benefits start before age 65, then payments decrease by 0.6% each month (or 7.2% per year), up to a maximum reduction of 36% at age 60.

■ If benefits start after age 65, then payments increase by 0.7% each month (or 8.4% per year), up to a maximum increase of 42% at age 70. (There is no additional advantage to starting benefits after age 70.)

In addition to the conventionally reported statutory figures, average national wage growth affects the CPP/QPP benefit calculation in such a way that often increases the delay incentive and also heightens the penalty for taking benefits early. When delaying benefits, however, it often results in even greater financial advantages.

These incentives – combined with the strength of these programs – have made delaying CPP/QPP benefits for as long as possible the safest, most inexpensive approach to get secure, worry-free retirement income that lasts for life and keeps up with inflation.

Waiting to claim CPP/QPP is even more attractive today than in the past, due to historically low interest rates, longer life expectancies and adjustments to CPP/ QPP delay rules in 2012. In addition, the CPP/QPP enhancements being phased in between 2019 and 2023 will ultimately make the CPP/QPP an even larger source of retirement income, therefore making the CPP/QPP claiming decision even more important.

Yet fewer than 1% of Canadians choose to delay benefits to age 70. In fact, over the past decade, Canadians have most commonly taken their CPP/QPP benefits as soon as they are eligible – at age 60 – likely without considering the far-reaching financial effects of this decision. In doing so, they are unknowingly giving up substantial lifetime income – as well as protection against financial market risks, the possibility of high inflation, living longer than anticipated and the anxiety of potentially running out of money in retirement.

How can Canadians move from the existing paradigm of taking CPP/QPP benefits as soon as possible toward greater awareness and appreciation of the excellent return and risk-mitigating aspects of delaying these benefits?

The Canadian financial services industry needs to fundamentally rethink its approach to advising Canadians who are nearing retirement, including a major change in how to address the CPP/QPP uptake decision.

Financial planning for retirement has evolved over time, and the advice on how to manage savings in retirement should adapt more closely to the current environment – one in which Canadians are facing longer periods of time in retirement, scarcer sources of secure pension income, low interest rates, and fewer adult children available to provide care to ageing parents as their health declines.

How about Long Term Care?

We will live longer in retirement: Many Canadians have the mistaken belief that their long-term care needs will be met through programs and services funded by governments. While government programs aimed at assisting Canadians with long-term care needs currently exist, these programs vary by jurisdiction and are at least partly dependent on the income and/or assets of individuals.

Canadians will become responsible for an increasing portion of the overall costs, either directly out of pocket, through increased taxes, or both. If family members try to keep up with the care needs of the seniors they will be supporting, they will need to increase their efforts by 40 per cent, some much more than others (ibid). The prospects for meeting this challenge do not look good – particularly when taking into account factors such as smaller families, more separated and divorced seniors, greater participation of women in the work force, fewer elderly parents living with their children, and reduced expectations and/or willingness to provide care services within families. This is not to mention the emotional, physical and financial stress already reported by family members providing unpaid care to seniors in Canada. According to projections, the price tag to pay for the unpaid hours of family care will increase year after year as the elderly population grows, reaching $27-billion dollars per year in three decades. These projections may in fact be underestimates. The bulk of paid long-term care is currently provided by personal support workers (PSWs), about 90 per cent of whom are women, and about 30 per cent are immigrants (ibid). COVID-19 has, moreover, exposed the inadequate pay and working conditions of PSWs to the general public. With already a shortage of long-term care workers, calls for employment conditions reforms for PSWs and an increase in staffing for institutions providing care will push up projected costs even further.

In conclusion

The study reviews the limited circumstances in which taking CPP/QPP early is a sensible choice. For the rest, having adequate secure lifetime income is more important now than ever before. Not only does it provide predictable financial stability in later years, but it also facilitates retirement budgeting, reducing concerns about outliving one’s savings and covering expensive health care costs (such as long-term care) later in life.

The economic shocks of COVID-19 have provided a grim reminder of the value of secure retirement income and the stress that comes from unpredictable financial markets. Increased CPP/QPP benefits help take the major post-retirement financial risks off the table, enabling Canadian seniors to spend their savings more confidently and joyfully in retirement.

Improving CPP/QPP claiming age decisions is the single most effective tool to directly augment the long-term financial security of Canada’s ageing population without major reforms to its retirement system. There are more than 20 million Canadians participating in the CPP and QPP and, every day in 2019, an average of over 1,000 Canadians made the decision to start their CPP/QPP benefits. With each coming year, as baby boomers reach the age of eligibility at age 60, more and more will be struggling with this financial decision that will affect them for the rest of their lives.

Based on a recent research by: Bonnie-Jeanne MacDonald, PhD, FCIA, FSA, National Institute on Ageing, Ryerson University. See the full Study Paper: http://cpp_qpp-research-paper.pdf