The average Canadian with the maximum Canada Pension Plan (CPP) benefit who is retiring this year can expect to lose $155,000 in lifetime income by taking CPP at 60, rather than delaying to age 70. (average life expectancy assumed).

This number doubles to nearly $300,000 for Canadians fortunate enough to live into their late 90s (not including CPP enhancements available to many Canadians).

Why do Canadians take CPP early?

If this is true, why do most Canadians elect to begin receiving their CPP benefit early? 95% of Canadians take their CPP at 65 or earlier.  Less than 1% delay to age 70.

The reasons are many, some irrational (a bird in the hand argument), and some are rational, but fail to hold up to scrutiny. Psychology and emotions certainly play a role. In addition, some Canadians don’t realize they even have the option to enhance their CPP benefit by delaying uptake..

To review, Canadians can receive a 0.7% increase in their CPP benefit for each month deferred past 65 (42% increase for full 5 year deferral), and conversely, a 0.6% decrease for each month taken prior to 65 (36% reduction to take 5 years early).

Further, a recent study[1] asserted that the total increase from delaying is actually a bit higher (closer to 49% than 42%). This is because CPP payouts for those that have not started benefits are annually nudged higher by an amount tied to the 12-month trend in wages.

Is delaying a good deal?

The same study quantified the value one receives, in easy-to-understand terms, in exchange for delaying receipt of CPP. It stated that delaying CPP is essentially the purchase of an inexpensive, inflation-indexed and very secure defined benefit (DB) pension.

When a Canadian defers CPP, they are basically ‘purchasing’ additional pension (CPP) benefits in exchange for the forfeited CPP payments during the deferral period.

Let’s focus on those forfeited payments for a moment – what type of pension (or annuity) would you be able to purchase in the retail marketplace for an amount equivalent to those lost payments?

Answer – the marketplace would yield annuity payments 40% lower for a man, and 50% lower for a women. In other words, it would cost nearly twice as much to buy the same level of secure pension income in the retail marketplace!

Of course, everyone’s scenario is different. There are some Canadians who simply do not have sufficient savings (eg. RRSP/RRIF) to bridge the income gap. There are others who may have a limited life expectancy. However, data shows most Canadians would be able to afford to delay CPP for at least a year; more than 25% could delay for 10 years.

We would recommend reviewing this topic thoroughly with a financial planning professional, as there are lifelong financial consequences embedded in the CPP uptake decision.

If you have any questions, or would like more information, don’t hesitate to reach out.

[1] https://www.fpcanadaresearchfoundation.ca/media/5fpda5zw/cpp_qpp-reseach-paper.pdf

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