Reforms being considered to the Canada Pension Plan (CPP)—which would impose higher penalties for opting to begin collecting CPP before age 65 and greater rewards for delaying take-up until after 65, were meant to ensure that people do not have a strong financial incentive to retire early—according to a report from the C.D. Howe Institute.
But the report, Comparing Nest Eggs: How CPP Reform Affects Retirement Choices, finds that once the interaction of these age-based CPP adjustments with the tax system is taken into account, some lower-income Canadians will still have financial incentive to retire early, because they face penalties if they don’t.
“Overall, the reform is a step in the right direction and enhances the flexibility of Canadians to work longer without being penalized for their choice,” according to report co-author Kevin Milligan. “But on an after-tax basis, for Canadians who collect the Guaranteed Income Supplement [GIS] and have no other separate source of income beyond CPP, pension wealth is maximized at age 60, on average, and is reduced from there on.”
The study examines three cases for “Joe,” a 60-year-old considering his retirement-age options.
1. In the first case, the report does not account for taxes and simply discounts the gross CPP benefit flow back to age 60 for each retirement age.
2. The second case accounts for income taxes and income-tested government-benefit clawbacks. It also assumes Joe receives $20,000 of employer-provided pension income. This extra income makes Joe ineligible for benefits from the income-tested GIS.
3. The third case removes the $20,000 of pension income and observes the significance of the GIS.
The report finds that the size of the gain (or loss) from the proposed CPP age adjustment depends critically on the receipt of the income-tested GIS benefit, which is clawed back for lower-income retirees.
View the full report here.