As I reported on my own site, when an introduction and overview was released on April 11, the delayed-gratification strategy can more than double ultimate monthly benefits: in fact they may be a whopping 2.2 times more when started at 70 compared to the opposite tactic of taking them as early possible at age 60. Similar dynamics are at play with Old Age Security, but less dramatic because the earliest you can take OAS is the traditional retirement age of 65.
This month’s Retired Money column looks in more detail at two related benefits from postponing CPP as late as possible: it provides a greater hedge against continued inflation, and provides an annuity-like longevity hedge against outliving your money. These two are intimately linked, of course, since the longer you live, the more pernicious long-term inflation is likely to be.
What the research says about delaying CPP
You’ll probably see much more press on this as the NIA is releasing a paper on this topic each month between May and December. May 8 will be general education on the Canadian retirement income system while July 17 will explain the mechanics of delaying CPP (and QPP) benefits. The lead author is Bonnie-Jeanne MacDonald, PhD, FCIA, FSA, director of financial security research for the NIA at Toronto Metropolitan University. She is assisted by three contributors.
After I wrote about the NIA’s introductory papers, respondents to my post told me they’d never seen the precise 2.2 times figure before. No surprise there, as this seems to be news to many Canadians, despite being a staple of media personal finance articles, often promulgated by financial advisors. The NIA cites a 2018 Government of Canada poll that found an amazing two thirds of us didn’t understand that the longer you wait, the higher the CPP payout. Therefore, most Canadian retirees take CPP long before they turn 70.
While seemingly irrational, this is just human nature, says York University finance professor Moshe Milevsky. The author of multiple personal finance books doesn’t blame the common pre-retiree mindset that they’ll take benefits as soon as possible. He articulates the typical reasoning as some version of “Yeah, I can wait eight years and get so much more from this government faucet, but hopefully it doesn’t go down another drain.”
The so-called “surprise” at how much more one can get from CPP by waiting is 40% driven by government mispricing and 60% driven by consumer financial illiteracy, explains Milevsky. “Also, one thing nobody seems to account for is the ever-changing tax rules & rates … and how that uncertainty makes any long-term financial planning quite risky.”
Long a proponent of “longevity insurance”—aka annuities—Milevsky says “delaying CPP is the best ‘annuity-buying strategy’ you can implement. Everything else is just Plan B.” (He’s currently writing a book titled A Babylonian Centenarian & the True Story of the Oldest Biblical Annuity.)
Not everyone’s convinced to wait on CPP
Long-time retirement expert Malcolm Hamilton, now retired from Mercer, says the 2.2x bump is “mildly misleading.” While technically correct, the way it’s presented is an invitation to misinterpret, he tells me in a telephone interview. It shouldn’t be interpreted as being twice as valuable: “To a large extent if you’re getting twice as much a year for half as many years, it’s not like the huge gangbuster gain that people will assume.” Someone collecting CPP at 70 who dies at 80 receives 10 years’ fewer benefits, relative to someone who starts collecting CPP at 60. The increase for deferring and reduction factors calculated by Ottawa’s chief actuary are supposed to be financially neutral for CPP, Hamilton says. “Bonnie’s conclusion is correct: it is often advantageous to defer, but only for those who can afford to defer … and who are in good health with normal life expectancies.”