60 vs 65 - Applying early for CPP can mean more money in the bank - the decision is a choice between receiving your normal benefit starting at age 65 or starting earlier and receiving a smaller monthly amount
Guest Commentary by Richard Shillington
originally published by StraightGoods.ca
When should you start collecting your CPP retirement benefit, at age 60 or age 65?*** This is a decision which the vast majority of Canadians will face and which has a financial impact of many thousands of dollars. Yet the existing rule of thumb, suggesting a "break-even point" at age 76, is somewhat simplistic. And that figure can be wrong for a significant number of Canadians, particularly those retiring without an employer pension.
The "Early CPP" decision is a choice between receiving your normal benefit starting at age 65 or starting earlier and receiving a smaller monthly amount. The earliest you can start is at age 60 when the amount will be 70 percent of your normal starting value. For example, if you are eligible for $800 per month (the current maximum is about $850) at age 65, then if you start at age 60, you would get $560 per month.
The decision is a choice between receiving your normal benefit starting at age 65 or starting earlier and receiving a smaller monthly amount.
My analysis of the decision of when to start CPP suggests, for reasons I'll explain below, that if either of the following is true then you should start your CPP retirement benefit at age 60:
- If you'll have some employment income between age 60 and 64.
- If you'll be eligible for the Guaranteed Income Supplement after age 65.
Cash flow analysis
The general advice I've seen in various articles is that the break-even point for early CPP is age 76. That is, if you take early CPP you will be better off unless you die after age 76. This figure is based on a very simple cash-flow analysis, comparing the total amount received if you start CPP at age 60 with total funds received if you had started at age 65.
The chart below shows how the cash flow analysis works. In case A, you have a choice between receiving $850 per month starting at 65 or $595 per month starting at age 60.
This analysis ignores inflation, any contributions on earnings between age 60 and 64, income taxes (on contributions and benefits) and any clawbacks (OAS and GIS).
Case A – Cash Flow Only
"Time value of money"
Some analysts have criticized this most simple financial analysis because it ignores the "time value of money", that $1,000 received at age 60 is worth more than the same amount received later, not just because of inflation but also because it can be invested and earn a rate of return that exceeds inflation. This suggests a discussion as to whether the "time value of money" matters to those who are not investing the funds. That is, does it matter that the money could be invested, if in fact you are spending virtually every cent of your income? Remember, CPP benefits are indexed to the CPI, and the value is suppose to go up over time, sufficient to cover the increased cost of living.
My take is that an analysis of the "Early CPP" decision, which includes the time value of the money as an investment, only matters to those who are actually still saving for retirement, who are making additions to the retirement savings, not withdrawals. If you are no longer saving, you can ignore the time value of money.
The chart below shows how the analysis works after including the "time value of money" — Case B.
Case B – Including Time Value of Money
I have not seen any analysis of the "Early CPP" question, which considers the case of those who choose to remain employed after age 60.
Employment while aged 60 to 64
When you start receiving CPP retirement benefits, you and your employer stop making contributions. So if you are employed and take early CPP, your regular paycheque will increase by about 5 percent of your earnings up to 5 percent of $40,000. This can be a saving, before tax, of up to $2,000 per year.
This example is for someone who works as an employee earning $40,000+ per year. Now the breakeven is when the person reaches their late 80's.
Case C – with Earnings aged 60-64
For the self-employed who pay both the employer and employee side of CPP, the savings are double. So if your earnings are $40,000 or more and you opt for early CPP, in four years you can save $20,000 in reduced contributions plus receive as much as $35,000 in early CPP benefits before you turn 65. In this case, you're ahead by more than $50,000 at age 65. Your CPP benefit after age 65 will be reduced by roughly $3,000 per year. Your breakeven is age 98.
Receipt of the Guaranteed Income Supplement
I have not seen any analysis of the "Early CPP" question, which considered the case of those who will be eligible for the Guaranteed Income Supplement (GIS) after age 65.
The GIS is an income-test benefit, which goes to lower-income seniors and their spouses. To be eligible, a senior or their spouse must be 65+. As well, the couple must be low-income. For more information on eligibility for GIS and the associated programs see the government web-site. If you are likely to be eligible for GIS at retirement then you need specialized retirement planning advice (For more information, see my web-site)
About 40 percent of seniors receive the GIS, so it is a very common benefit. Indeed, the majority of those who retire without an employer pension plan will be eligible for GIS.
How does GIS affect the value of my CPP benefit?
You need to understand that the GIS benefit declines as income increases. For every $1,000 of income, GIS is reduced by $500. So after age 65, the extra monthly CPP you get for waiting and applying at age 65 actually reduces your GIS.
If you take early CPP, the reduced CPP benefits after 65 will be offset — somewhat — by increased GIS benefits. CPP is taxable. GIS is not taxable. So by taking CPP early you reduce your CPP, which was taxable, and increase your GIS, which is tax-free. So this really helps.
Imagine someone on GIS, who could get $10,000 per year from CPP at age 65 but elects to take $7,000 at age 60. After age 65, their CPP will be $3,000 less per year, but their GIS will be $1,500 more. Because GIS is tax free, early CPP also reduces their income tax. After, considering the impact of GIS and income taxes, they are not worse off by $3,000 per year for taking early CPP but only $750.
As the following chart illustrates, those of us who will be eligible for GIS will be significantly better off for having taken early CPP.
Case D – with GIS
Note that the older you are, the more likely you are to be eligible for GIS. This means that for the population without an employer pension, early CPP reduces your income during a time period when you are more likely to be getting GIS anyway.
This finding, that Early CPP is a "no-brainer" for those on GIS would also hold for those receiving any other income-tested benefits. The most obvious example would be people living in subsidized housing, where your rent depends on your income. By reducing your CPP income, you can also, depending on your circumstances, reduce the deductible for your prescription drugs, the cost of home care services, or meals on wheels or nursing home services.
Disability benefits for you and your children
Once you apply for CPP retirement benefits you are no longer eligible for CPP disability benefits. Thus, if you become disabled after receiving early CPP but before age 65, you and your children could lose out on the more generous disability benefits.
Applying for early CPP
In order to apply for early CPP you must cease working a few weeks. The purpose of this provision is unclear — you might want to ask your MP. You'll have to sign a form indicating that you have met these requirements, although it is unclear how they, Ottawa, would know if you hadn't.
To qualify for a retirement pension between the ages of 60 and 64, you need to do one of the following:
Stop working - This means that you are not working by the end of the month before the CPP retirement pension begins and during the month in which it begins. For example, if you want your pension to begin in April, you have to stop working by the end of March and you cannot work during the month of April.
Earn less than a specified amount - This means you earn less than the current monthly maximum CPP retirement pension payment ($828.75 in 2005) in the month before your pension begins and in the month it begins. For example, if you want your pension to begin in April 2005, you need to earn less than $828.75 in both March and April.
Once you start receiving your CPP pension, you can work as much as you want without affecting your pension amount. However, you cannot contribute to the CPP on any future earnings from employment.
Arranging your wages and work hours to meet this requirement will be fairly easy for those who work for a small firm or are self-employed. Being laid off for a month would do. Such arrangements would likely be very difficult for those who work for large organizations. From a policy point of view, Ottawa is making noises about allowing a more flexible transition to retirement. Since the current CPP requirement that one stop working for a month or so serves no useful purpose, is unenforceable and has an inequitable impact, Ottawa should allow Canadians to apply for CPP when it suits them.
Average earnings at age 60 compared to age 65
You need to kept in mind that the 70 percent rule is a simplification; your choice is between 70 percent of the monthly CPP benefit you would be eligible for based on your average earnings to age 60 or 100 percent of the monthly CPP benefit you would be eligible for based on your average earnings to age 65.
You average earnings at age 60 are not the same as at age 65. They are likely very close, but not the same. CPP ignores some years with low earnings in calculating your average. So working during the years you are aged 60-64 could increase or decrease your average.
Applying for CPP
Make sure you apply. Each year several hundred Canadians apply for CPP in their 80's; Ottawa feels no obligation to tell you about your benefits. Ottawa only pays 11 months of retroactive benefits even if you missed out on many years of CPP.
When you apply for CPP, make sure to see if you are eligible for the Child-Rearing Drop-Out. Ottawa will ignore years with low earnings because you had a preschool child at home.
Once the checks start coming, as best you can, check the amounts. Are they reasonable? If the amounts are wrong, you have very little chance getting retroactive cheque. Even when you are entitled to full retroactive benefits because of an administrative error on Ottawa's part, they do not pay interest.
If you run into problems, document, document, document. Keep a diary of any discussion you have with the bureaucracy, including times, dates and names. If you are not sure that you are getting the correct amount, the Retirement Planning Institute runs an excellent service. For a modest fee they will double-check the amount you are getting. About 1 in 6 of their clients gets additional benefits.
Remember, there are also CPP benefits for those unable to work due to a disability and for survivors where your spouse has died, both a death benefit and a survivor's benefit.
Current information on CPP Benefit Rates: www.hrsdc.gc.ca/en/isp/statistics/rates/aprjun07.shtml#topic1
To get a Statement of Contributions (your earnings record and likely CPP benefit): www.hrsdc.gc.ca/en/isp/common/proceed/socinfo.shtml
Richard Shillington has degrees in statistics and has conducted for 30 years research on health, social and economic policy. He has worked variously for governments, the private sector and NGO's. He also comments for television, radio and newspapers on issues of taxation, human rights and social policy.
***Note from NUPGE: This article was written primarily for a general audience. If you belong to a public sector pension plan, the plan is most likely integrated with CPP and therefore the advice given in this article might not be appropriate for you. With integration, the combined benefits from both plans are equivalent to what a plan member would have received from the workplace plan alone.