The old adage “good things come to those who wait” is especially true of Canada and Quebec Pension Plan benefits.
A $1,000 monthly CPP/QPP benefit in today’s dollars at age 60 increases to $1,112.50 if the individual delays until age 61 and to $2,218.75 if they wait until age 70, equivalent to more than $100,000 in extra income in retirement, according to a 2020 research paper by Ryerson University’s National Institute on Ageing and the FP Canada Research Foundation. However, the paper found fewer than one per cent of Canadians delayed CPP/QPP benefits until age 70 in 2009, while more than 95 per cent took CPP/QPP at age 65 or earlier the same year.
Bonnie-Jeanne MacDonald, director of financial security research at the institute and the paper’s author, says a lack of knowledge is the top reason Canadians take their CPP/QPP benefits earlier than what might be good for them. “During my research, I was notified by Employment and Social Development Canada that they were running an online survey to understand why people were taking CPP early. What they found was two-thirds of Canadians didn’t understand that the income would go up if they waited.”
Some Canadians are also receiving advice from financial planners and advisors that may deter them from delaying the start of these benefits, she adds. “There’s the predominant approach by planners and advisors where they say, ‘If you’re going to live until you’re 80, delay your CPP. But if you’re going to die earlier, then it’s bad.’ It makes [individuals] overemphasize loss rather than [see] the full picture, which is by delaying, they’re going to have potentially a lot to gain in the long term.”
There’s also a significant amount of misinformation regarding the ongoing viability and security of CPP, she says, which may prompt some Canadians to start taking benefits as soon as possible. “When I dug a little deeper, I found one of the reasons is that, in the U.S., they do have issues with their social security and a lot of that media trickles into Canada. Another reason is that, in the late 1990s, the government wanted to increase the contributions to CPP because there were questions around sustainability, but that was fixed. People may remember the message that there was a problem, but didn’t realize it was solved.”
Jeff Barber, director of pension and economic affairs at the Ontario Teachers’ Federation, says while many plan members opt to take CPP early, he encourages them to delay as long as possible.
He compares CPP benefits to Stanford University’s 1972 marshmallow experiment, in which children were given the choice of receiving one marshmallow immediately or two if they were willing to wait 15 minutes. “My thought is that, if you’re hungry, you should eat the marshmallow, but I think you should delay it as long as possible. . . . Some see delaying CPP as a gamble. They might think they’ll be more active at a younger age and might want the money to travel, for example, more so than in their 90s. But the monthly cost of a long-term care home is extraordinary and when you’re on a fixed income, you’ll need additional funds to bolster that.”
The role of CPP in retirement planning is covered in the OTF’s pension workshop for pre-service teachers. “People only tend to go to pension workshops in the last two to five years of their careers and, in many cases, that’s too late for them to get their heads around it,” says Barber.
MacDonald says employers can play an important role in helping shape employees’ retirement decisions, including how the timing of CPP/QPP benefits can affect their golden years.
“A lot of times in the past, once someone left their employer, they were fending for themselves. This is changing to a holistic strategy of helping members who won’t get enough secure income through their [retirement] plans to . . . retire with security and have their basic needs met. Employers are in the best position because they don’t have the conflict of interests that can exist elsewhere. The more involved an employer gets in the decumulation stage, the better.”
While some individuals opting for early CPP/QPP may think they’re getting more money, MacDonald explains that for every month the benefit is taken before age 65, recipients actually see their monthly payments decrease by 0.6 per cent — a total of 36 per cent if benefits are taken at age 60. However, past age 65, it rises by 8.4 per cent per year to a total of 42 per cent by age 70.
“By waiting until 70, your pension increases by 120 per cent. . . . Even by delaying from age 60 to 61, you increase it by 11 per cent plus inflation, so it’s closer to 15 per cent. There’s no other investment where you’re guaranteed to get 11 per cent after fees and inflation.”
And while some retirees may want to take CPP/QPP early because they haven’t saved enough through their pension or registered retirement savings plans, she says these individuals can put themselves in a better financial position by using any savings they do have to delay the start of CPP/QPP benefits.
“If, for example, you delay by five years, you’d need to bridge yourself over that time. But if you took that money and bought an annuity in the retail market, you’d get half the amount [that you would] from delaying your CPP. If people haven’t saved enough, that’s all the more reason to delay CPP, because they’ll get a lot more for less risk.”
Blake Wolfe is an associate editor at Benefits Canada.