New report investigates financial considerations amid low-interest backdrop and general expectations of longevity
A new analysis suggests that given today’s demographic and macroeconomic realities, more Canadians would be better off delaying CPP benefits.
Prepared by the Canadian Institute of Actuaries (CIA) and the Society of Actuaries, the report titled The CPP Take-Up Decision focused on workers retiring at age 65 with plans to use some portion of their RRSP or RRIF savings to augment their retirement consumption. It relied on an analytical framework that compares two financial strategy options which differ only in the timing of the choice to take CPP.
“Delaying the CPP pension beyond age 65, up to age 70, increases the payment amounts by 0.7% for each month after age 65 (or 42% for the full 60-month deferral,” the report said. “Delays beyond age 70 would increase neither annual nor lifetime benefit levels.”
Delaying CPP payments to age 70, in the case of 65-year-old Canadians who leave the labour force, also has no impact to their base benefits. Another often-overlooked advantaged, the report said, is that at age 70, the calculation is based on 142% of the earnings base at take-up, which rises over the five years after age 65 with the compounding of inflation and wage growth.
“Delaying QPP payments operates in a similar way – with the exception that the non-contributory years between age 65 and 70 could impact the earnings base calculation if the retiree has insufficient drop-out room,” the report added.
According to the analysis, which was performed using stochastic individual microsimulation modelling, the choice on timing of CPP payments hinges largely on current investment returns and life expectancy.
Researchers determined that even in a case extremely in favour of more immediate CPP payments, a person still faces a 50% chance of getting more income from delayed CPP payments, with some remaining risk of a much worse outcome.
The results should hold up reasonably well whether or not individuals are married, the authors argued, as the necessary features they considered in their framework are not affected by marital status.
“This research shows that given today’s low interest environment and general population longevity expectations, delaying CPP payments is clearly a financially advantageous strategy,” said CIA President Michel St-Germain.
