The CPP Dilemma

The Canadian Pension Plan  is such a common topic asked about in our financial planning practice, I believe there is room for refreshing the topic at least.  However, as I form my notes, I get reminded that some areas of this are so complicated and the calculations so hard, that I struggle to fully comprehend them myself and here I am about to impart my knowledge on you.  Most importantly though, I do know that the decisions to be made and the outcomes experienced are completely different for every individual and family because the important decision factors are related to you and your life, not the program.

So How Much Might I Receive?

Currently, someone that has worked 40 years after the age of 18 at or above the maximum contribution level each and every year and now age 65 will receive almost $1100 per month. Our practical experience as planners tells us this is actually the case for very few individuals with most receiving something slightly different. You may have made less than the maximum early in your career. You may have had periods of unemployment during your career.  You may choose to quit work before 40 years etc. Service Canada can be contacted to get an estimate and a clear picture of your history of contributions.  Mothers will not get a clear estimate nor will those that worked outside of Canada.   Mothers may toss out of the calculation any year in which they had a child under age 6 and this is information that Service Canada may not have. Nor will they usually know if you worked outside of Canada.

You may optionally start your CPP as early as age 60. Beginning in 2016, the cost of an early start is 0.6% per month for every month early. At age 60, you are five years or sixty months early, therefore your regular qualifying amount will be reduced by 36% (.6% X sixty months = 36%). Age 62 ½ would be thirty months early, thus an 18% reduction and so on. 36% seems like an awful lot to give up and it is. Yes, you will be receiving money during a period when it would otherwise be zero, but at age 65 and beyond you will be receiving only about two thirds of what you otherwise would get. The calculations will show that the total money received is greater from an age 60 start only if you do not live to age 74. If you live longer than age 74, the total you will collect in your lifetime will be less than if you had waited until age 65 to begin your CPP. Life expectancy for both males and females at the time you are making these decisions is more than age 84, so living past age 74 is very likely for most. Then why do people take it early if by age 74 it starts to cost them money?

That Is The Dilemma!

We know that it is highly likely that our lifetime wealth will be improved by waiting to age 65 to collect our CPP,though waiting longer up to age 70 has a less dramatic effect. Yet there are other factors for us to consider within our own situations. We may need more money in our early 60s than we do in our late 70s because we are more active now. In other words, the money has more importance to us dollar for dollar, when we are younger and still active.

You may have doubts about your life expectancy. You may need the money now and have no other alternative sources of cash.  You plan to travel young and rest as you age.  Your taxable income might be lowest before age 65 when OAS starts and higher after age 65 or age 72 when your RIF starts. Conversely, if you are still working or for other reasons have high income at age 60, you will pay a greater percentage of tax on the early payments, making the already bad calculation worse.  Wait until your income and tax bracket fall, so wait to 65 or beyond.

Spousal Life Expectancy

If you have a spouse any decision is much more difficult and much harder to clearly assess.  Most surviving spouses will receive a survivor’s benefit if their spouse was entitled to or already receiving CPP when they died.  However, the amount is subject to some limits. First and foremost, you cannot receive a combined benefit of both your own CPP and a survivor’s benefit greater than 100% of the benefit available to you in the year you began your CPP. Therefore if you started your CPP at age 60, and your spouse dies, your survivor’s benefit may be limited because you are only entitled to 64% of the maximum benefit in the year you started your payments. If both of you were among the lucky few that receive maximum possible CPP, there will be little if any survivor’s portion and all of the deceased individual’s CPP is lost.  In the circumstance where the deceased spouse started their CPP at an age later than the survivor’s, the maximum may be eased with a small adjustment.

There are numerous possible outcomes and the decision process is complicated and ever-changing. The truth of the matter is that the decision to start your CPP early or later has no right answer outside the framework of your own total financial picture. Everyone has a different tax situation, different levels or patterns of activity, different thoughts on life expectancy. Spouses have different age gaps, work histories and CPP start times.

Instead of going with your gut, complete a comprehensive financial plan, to give context to the decision and test different scenarios that work for YOU.

Don’t miss Gord’s weigh in on the pros and cons of government bonds in our previous post.