Today, it would be difficult, if not impossible, to live off the Canada Pension Plan (CPP) unilaterally. The plan is instead designed to supplement one’s retirement income.
The CPP is beneficial in the sense that it provides virtually everyone who contributes to it with at least some form of deferred savings. We could debate its efficiency as a means to save for retirement: the payments are fully taxable at one’s marginal tax rate in retirement (subject to the availability of splitting with one’s spouse); however, the credit we receive when making contributions to the plan is only non-refundable at Canada’s lowest marginal tax rate. The key point is that in contributing to the CPP, we are ensured some benefit in retirement – whatever form that may take.
In addition to paying a retirement pension, the CPP carries benefits, including:
• Post-Retirement Benefit – A supplemental payment to those who continue to work (and pay into the plan) after they start receiving their retirement pension.
• Disability Benefit – A monthly benefit payable to individuals who become severely disabled to the extent that they cannot work.
• Survivor Benefits – Payable to your surviving spouse or common-law partner.
• Benefits for Children Under 25 – Monthly payments to the dependent children of disabled or deceased CPP contributors.
• Pension Sharing – Available to married or common-law couples.
• Credit Splitting for Divorced or Separated Couples – Can serve to divide CPP entitlements earned while couples were living together.
• Death Benefit – Payable to the estate of a CPP contributor.
• Child Rearing Provision – Supplements your CPP if you stopped working in order to raise your children.
These benefits are beyond the scope of this posting, but worth mentioning nonetheless. What I’ll instead address is a question the financial planning industry regularly receives from individuals approaching retirement: Should I take my CPP early?
What to expect if you take your CPP early
Retirees can now take their CPP as early as age 60, or defer it until age 70 (the CPP administrators assume that a ‘typical’ retirement will begin at age 65). As one might expect, if you elect to take your CPP early, you will receive less. The trade-off is that you will receive your CPP sooner (and, presumably, for longer). Mathematically speaking, if you elect to take your CPP before the age of 65 you will give up 0.6% of your benefit for every month preceding your 65th birthday. For example, if you take it at age 60, you will be choosing to take your CPP 60 months early (5 years x 12 months), thus, your payments will be reduced by 36% (60 months x 0.6% per month). Conversely, if you defer CPP until age 70, your benefit will be increased by 0.7% per month of deferral, meaning you could ultimately increase your CPP benefit by 42% (60 months x 0.7%).
While taking CPP early seems to be a bad deal on the surface, plenty of people are doing it. The easiest way to explain why is to quote the old proverb: A bird in the hand is worth two in the bush. Obviously, health becomes a consideration. While I appreciate that it’s impossible to know what the condition of your your health will be years from now, my experience suggests that most people (however healthy they are) are not prepared to gamble on the unknown. Instead, they choose to take their CPP as soon as possible, and live with the risk that they might outlast their life expectancy (where they would have consequently been better off deferring their CPP).
Deferring your CPP
This chart shows an estimation of one’s CPP breakeven point under three separate possibilities. As you can see, if you defer your CPP you will ultimately be better off – provided that you live long enough.
The calculation of one’s CPP entitlement is a bit complicated. Your individual contributions dictate what you will receive up to a maximum, and with a few nuances (including a provision where you can ‘drop’ years where you might have had lower earnings from the calculation). The best way to determine your own anticipated CPP entitlement is to contact Service Canada and request an estimate.
For more details on CPP, visit the Government of Canada’s website
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Personable and professional, Brent Soucie specializes in cross-border tax and financial planning for U.S. citizens and/or Green Card holders residing in Canada, as well as Canadian residents with U.S. employment and/or property. His clients include professional athletes, entrepreneurs, and corporate expertise.
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