Thanks to a rare event, deferring CPP until age 70 may no longer always be the best option

The Canada pension plan contains endless intricacies that can trip even the experts up from time to time. My usual advice of postponing CPP until age 70 to get the most out of the plan doesn’t work in 2022, at least not for seniors approaching 70. The problem? High inflation paired with mediocre wage growth.

By now, most older Canadians know that they can wait until age 70 to collect CPP (QPP in Quebec). At least some also know that if they wait until 70, their CPP pension would be adjusted upwards by 42 percent.

Almost nobody knows – and this includes many actuaries and financial planners – that the actual adjustment is not really 42 percent; it will be more or less depending on how wage inflation compares to price inflation in the five years before age 70. It turns out that this obscure fact is crucial. The usual reward for waiting until age 70 to start earning CPP is that the eventual annuity amount to be paid is usually much higher than if you had started your annuity earlier, e.g. B. at the age of 65 years. In 2022 this will not be the case. As we will see later, someone who is 69 in 2022 and has waited until 70 to start their CPP is much better off starting it this year instead.

At the heart of the problem is what happens during the five-year deferral period from age 65 to age 70. During this period, the pensions of those who defer CPP will increase each year due to wage inflation, as the CPP earnings cap is still growing and is based on wages, not prices.

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On the other hand, the pensions of people who started drawing them at the age of 65 increase every year Price Inflation. Historically, wage inflation has outpaced price inflation by about one percentage point per year, although this is only a broad average. The actual difference can vary greatly and even be negative.

I have long argued that moving the CPP to age 70 is beneficial to many, if not most, CPP participants. My position is based on expecting a 42 percent increase in pensions at 70. If the actual increase is better than 42 percent, that makes the deferral all the more beneficial.

The adjacent chart shows what the actual CPP pension improvement would have been for retirees who would have turned 70 between 2009 and 2023. Leaving aside 2023, the payout for deferral has consistently been better than 42 percent.

What’s surprising is how much better procrastination has been in a few years. The people who reaped the greatest rewards were those who turned 65 in 2009 and chose to defer their CPP until age 70 in 2014. At 70, they received 54.9 percent more pension than the expected 42 percent. In general, anyone who turned 70 in any year between 2012 and 2016 got at least 50 percent more from procrastination.

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The chart also reveals a big surprise on the bottom that might prompt some readers to take immediate action. It shows that the actual increase in CPP at 70 versus 65 for people turning 70 in January 2023 will be just 37.9 percent. (This assumes the CPP earnings cap will be $66,500 in 2023, a good bet).

While that’s not much less than 42 percent, it’s enough to change the usual procrastination advice. Those most directly affected are those over the age of 65 who have not yet started drawing their CPP pension.

Take Wade for example. He turned 65 in 2018 when he was eligible for a maximum CPP pension. Wade has always planned to start receiving his CPP pension in 2023 when he turns 70. It turns out Wade could be making $21,194 a year in 2023. But wait.

If Wade had instead started collecting his CPP on January 1, 2022, the amount to be paid would have been $19,940. Additionally, Wade would be eligible for the CPI increase for pensions paid on January 1, 2023, and this would increase his 2023 pension to $21,196. I expect the annual inflation number to be 6.3 percent from this October; in recent months it has been significantly higher.

At first glance, if Wade starts his CPP in 2022 or 2023, it looks like Wade will receive essentially the same pension in 2023. The difference is that if he starts in 2022, he’s $19,940 ahead of his 2022 pension. A second difference, not shown here, is that Wade, who continues to work, would no longer have to contribute to the CPP , when he starts collecting in 2022. This could save Wade another $7,000 if he happens to be self-employed with an income of $1000 or at least $65,000. In short, Wade has no reason to wait until age 70 to start accumulating CPP.

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If we replace Wade with Katherine and assume that she is 66 instead of 69, the same result will likely apply. I say “probably” because there is more time until Katherine reaches age 70 for economic factors to rebalance.

Does this mean that moving the CPP past 65 is no longer advisable? In general, it will remain the best option for many, but as we saw with Wade, you have to be careful.

In a way, 2022 is the exception that proves the rule. It is the result of COVID, a once-in-a-century event that causes a one-year increase in price inflation without a corresponding one-year increase in wage inflation. Incidentally, this analysis has no influence on the start of the AHV pension.

This should send an SOS to financial planners and accountants, as well as retirees who are taking a DIY approach. Postponing CPP will generally still make sense, but not necessarily in times of economic upheaval.

Frederick Vettese is the former chief actuary for Morneau Shepell and the author of retirement income for life.