Canadian Actuaries Publish Study on Pros/Cons of Delaying CCP

[Andromeda]

The Canadian Institute of Actuaries just published a paper on the pros and cons of delaying take-up of Canada Pension Plan (CPP) payments. Although the paper is focused on the Canadian system, it might have some relevance to similar decisions made under other countries' regimes.

https://www.cia-ica.ca/docs/default-source/research/2020/rp220114e.pdf

The key finding (supported by a lot of math - these are actuaries after all) is this:

"For retired Canadians with sufficient bridging funds in their RRSP/RRIF savings that they intend to use towards increasing their lifelong annual retirement consumption, the financial trade-offs underlying the decision to delay CPP payments depend on mortality and financial market returns. In other words, from a cashflow and savings perspective, the CPP timing decision is unaffected by those considerations that are normally key to retirement financial planning – such as Guaranteed Income Supplement (GIS) benefits, taxes, pension income, other savings, or even the level of the CPP benefit itself. Mortality expectations and financial market returns are the only direct factors affecting the financial trade-offs in terms of cashflow and savings."

 

[Sunset]

If a person is eligible for CPP and SS, which most likely means subject to WEP, then they might consider collecting CPP at age 60 , since any increase in CPP will be cut in 1/2 by WEP. Especially if they are delaying SS to age 70.

Within Canada considerations only, the article does say low-income seniors should claim at 60 to decrease the clawback in GIS and OAS (these are 2 extra programs to boost low income), as well as because low-income folks die earlier. (2.5 years less is an interesting point).

"Another implication of these results relates to low-income seniors. The results of this analysis were originally not
intended for Canadians who are likely to be recipients of GIS benefits. That is because literature suggests that the
advantages of delaying CPP are likely much less relevant for lower-income Canadians given their lower likelihood of
holding sufficient private savings to fund a delay in receiving a CPP pension, their relatively lower life expectancies,
and the income test in the GIS benefit calculation. For example, the OCA finds that 65-year-olds who receive the GIS
are living approximately 2.5 years less than those not receiving it (Table 1, OCA, 2016a), and this mortality gap has
been relatively stable for the last three decades. In addition, the CPP pension is taxable and counts towards the
income-tested clawbacks in the GIS benefit calculation. Earlier research by C.D. Howe finds this severe financial
penalty can make it preferable for GIS recipients to take CPP payments as soon as they turn 60"

 

[samm]

If a person is eligible for CPP and SS, which most likely means subject to WEP, then they might consider collecting CPP at age 60 since any increase in CPP will be cut in 1/2 by WEP. Especially if they are delaying SS to age 70.

+1
Exactly.

 

[samm]

"...Mortality expectations and financial market returns are the only direct factors affecting the financial trade-offs in terms of cashflow and savings."

It took more than 10 actuaries to say..."it depends... and we don't have the answer."

 

[kcowan]

The other aspect for me was the dropout provisions. You are allowed 8 low income years to be excluded from the calculation. I retired from employment at 50 and arranged my consulting income to have 3 out of 10 years with minumum taxable income. Add in the 5 years from age 60 to 65, and it was to my advantage to retire at 60.

This aspect is seldom discussed because it is unusual. A friend who retired at 57 was alerted to this by me and he claimed it at 60 as well.

 

[Andromeda]

It took more than 10 actuaries to say..."it depends... and we don't have the answer."

Of course, simple and definitive answer would be ideal. But props to the actuaries for ruling out a lot of variables. Learning that there are only two factors/probability assessments to consider, instead of many factors, is quite helpful.

 

[Koogie]

The other aspect for me was the dropout provisions. You are allowed 8 low income years to be excluded from the calculation. I retired from employment at 50 and arranged my consulting income to have 3 out of 10 years with minumum taxable income. Add in the 5 years from age 60 to 65, and it was to my advantage to retire at 60.
This aspect is seldom discussed because it is unusual. A friend who retired at 57 was alerted to this by me and he claimed it at 60 as well.

As you know I am in a similar situation to yours and I will have to help DW make that decision in 5 years also.

What did you use to do the calculations ? Something online or was it using steves (RIP) software ?

 

[brett]

It was to my advantage to take CPP at 60. I had no CPP contributions past age 59. Averaging at age 65 would have hurt me because of the number of max. contribution years that I had. I was able to get in under the old rules and took much less of hit than might have otherwise been the case. OAS clawback rules also made taking CPP at 60 advantageous.

It was very advantageous for my spouse to take CPP at 60 because she did not have many contribution years but she also got credit for her child rearing years.
She had far more out of it in two years than she ever contributed because of the low premiums in prior years. We were quite surprised at her monthly amount.

The third issue was what would be the combined benefit if one of us were to die. There is serious penalty to be incurred if both spouses are at the max. CPP benefit and one passes away. THis was not the driver for us but a friend has experienced this.

 

[kcowan]

I used a spreadsheet that had been provided by my employer 10 years earlier. And the CPP website. Reran the simulation with the dropout years and showed that the number would be lower by waiting until 65. This was under the old rules 17 years ago.

And spouse also had a similar situation. So we also avoid being reduced as much by the maximum when one of us predeceases the other.

The decision is not trivial unless you just have a salary all your life.