# Ottawa discourages taking early CPP



## Jon Chevreau

http://www.nationalpost.com/news/story.html?id=1631145

Looks like those who opt for early CPP at 60 get benefit reduction of 36% instead of 30%. Waiting till 70 means 42% bump up compared to previous 30%. 

Guess they want to keep us weary boomers in harness till we drop!


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## Kathryn

I read that this morning too.

Are there any advantages taking it early .. unless you've got a terminal illness and know you won't live well into your retirement years?


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## steve41

If you run the numbers, there will be a disadvantage to taking early CPP (even under the old rules). It relates, as mentioned, to your estate. Most people don't have the self control to delay taking CPP at 65, but the math argues they should. With these new rules, this will become even more apparent.


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## CanadianCapitalist

I wrote about this today on the blog. 

*Major Changes Coming to the Canada Pension Plan*

I linked to the Department of Finance paper that explains the changes. It can be found here:

http://www.fin.gc.ca/n08/data/09-051_1-eng.asp

It looks like the Government isn't done with the tinkering. The Ottawa Citizen reported that more changes to the pension system may be coming.


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## Ben

steve41 said:


> If you run the numbers, there will be a disadvantage to taking early CPP (even under the old rules). It relates, as mentioned, to your estate. Most people don't have the self control to delay taking CPP at 65, but the math argues they should. With these new rules, this will become even more apparent.


It seems that the major variable in determining whether to take CPP at 60 or 65 is how long you expect to live. 

If you take it at age 60, and die at age 75, then you are probably further ahead financially.

If you take it at 65, and die at 95, then you are likely further ahead.

There is a breakeven age/life span (let's say 80) where the financial benefit of both options intersects.

Unfortunately, we cannot predict how long we will live (we can make educated estimations based on several factors). 

I do believe there are calculators out there that can tell you what your breakeven age is, ie. what age you would have to live to in order for taking CPP at 65 to be the most valuable option. These models need a lot of assumptions on inflation/interest rates in order to compute the age.

Of course, we all like to think optimistically, so might be inclined to choose 65 option.

Grabbed the first link I found on the subject.
http://www.edmontoncga.com/images/site/chris.pdf


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## steve41

For an example.... a 59 yr old with 500K in his rsp who takes cpp at 65 will make it out to (die broke at) 95 with an after tax income of $29782. (based on BC taxes, inflation at 2% and a mkt growth rate of 4%)

If he opts to take his cpp at 60, he will run out of capital 2 years earlier at the same income level. The intersect point being roughly at age 79. In other words, if he opted for cpp at 60 and he died before age 79, his estate would net more... dying after 79 means his estate would suffer.

Mind you his life expectancy is 82 if he is a non-smoker, 77 if he is a smoker, so I guess the rule is: smokers should opt for cpp at 60, non-smokers at 65.


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## apples

well well well, just as most of us were told that the CPP is well and sound for the next few decades, here comes the change in rules...

in time, i wonder if this will also affect all the DB plans that are integrated with CPP - i.e. the bridge benefit one receives before 65 (usually 55-65) for most of the public sector pensions may change as a result...

on the note of break-even point of taking CPP early - 77 was the magic age we concluded in a pension seminar i attended, that is before all this is happening of course.


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## Ben

apples said:


> well well well, just as most of us were told that the CPP is well and sound for the next few decades, here comes the change in rules...
> 
> in time, i wonder if this will also affect all the DB plans that are integrated with CPP - i.e. the bridge benefit one receives before 65 (usually 55-65) for most of the public sector pensions may change as a result...
> 
> on the note of break-even point of taking CPP early - 77 was the magic age we concluded in a pension seminar i attended, that is before all this is happening of course.


There can be no one single magic age for the break even. It depends on, among other things, interest rate assumptions used in time-value of money calculations.

77 is only one output from the set of assumptions that were used for simplicity in your seminar. Probably quite reasonable assumptions, of course, but assumptions nonetheless.

The link I attached to my original reply seems to be a simplistic illustration that does not use time-value. There are probably better analyses out there.


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## Spidey

This is not good news for those of us who wished to retire early. It seems that the top end of the baby boomers had everything in their favour - cheap housing when they purchased, booming housing when they downsized, booming stock market while saving and if lucky they moved to mostly income investments before the latest crash, good job market, etc. etc. Meanwhile the bottom end of us baby boomers seem to be getting the shaft.

I know, I'm whining. I admit it.


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## ethos1

*My approach to CPP*

For what its worth for those who think waiting till they are 65 to collect

Two years ago at 60 I started to draw my CPP which at that time was just on $600/mth, I also chose not to have the feds take off any tax

Each month the $600 (now more) goes straight into my RRSP account & since I am still working (& plan to do so till 65 or beyond) I am also not paying the $2000+ per year in CPP premiums which I figure has given me a tax free $2000 year salary increase 

On a rough calculation doing it this way the actual CPP on a yearly basis comes in at $600 x 12 = $7200 + the $2000 saved on the premiums = $9200/yr ($766/mth) + the net tax advantage on putting the lot into an RRSP

By taking it early I reckon the catch up age is about 85 & you never know, it may also be possible to get more GST credits as well possibly qualify for some GIS at 65 more than what someone who decided to wait till 65 to collect their CPP


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## cannon_fodder

steve41 said:


> If you run the numbers, there will be a disadvantage to taking early CPP (even under the old rules). It relates, as mentioned, to your estate. Most people don't have the self control to delay taking CPP at 65, but the math argues they should. With these new rules, this will become even more apparent.


When you run the numbers, the difference is quite striking for most cases. Only in circumstances where your retirement funds would run out before you hit 70 and thus need to take CPP early would you possibly see a significant benefit.


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## Ben

I'm a long, long way from having to think about this question seriously, and will of course be giving it careful consideration at that time based on my net worth, life expectancy, etc, etc. 

My gut feeling is that even if taking at 65 might be more advantageous under some/most sets of assumptions, taking CPP at 60 sure seems like one way to achieve earlier retirement and generate income to bridge the years between early retirement and age 65. Even if on a whole-life net worth basis, delayed payment may come ahead for the long-lived, the additional enjoyment one gets from retiring early with more youth and energy to enjoy those early retirement years may balance out the financial benefit. 

If it were all about dollars and cents, then the calculations and decision might be fairly simple. But when more qualitative values are thrown into the mix, then it becomes a little less black and white.


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## steve41

> then the calculations and decision might be fairly simple


When you consider that determining which strategy is better than another requires you to look at the after tax effect of income other than CPP income (both to the subject and to the estate) and that tax cannot be looked at in a vacuum, but as it affects income from all forms of capital as well, then, no, it turns out the calculation is very tricky.... far beyond the scope of simplistic tools such as the spreadsheet.


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## stephenheath

Taking it early is often also a good course of action for some of the older boomers who still have defined benefit pension plans. For example, some of the older defined benefit pension plans reduce themselves by the amount of CPP that is received by the pensioner, therefore taking the CPP early before the defined benefit pension kicks in means your total pension is still the same and you have the 5 extra years of income (and before these changes, 5 extra years of no CPP payments).

For the pension plans that aren't affected by the amount of CPP, spreading it out may reduce taxes, as steve41 mentioned, and it's definately worth running the numbers.

And as a side note... these mid-stream changes (for me it's mid stream since I'm in my 30's) are exactly why I wouldn't want the government handling more of my retirement funds... it's hard enough to meet your goals when the rules don't change.


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## Jon Chevreau

My "Hello, Freedom 70?" column on this ran today at http://www.financialpost.com/opinion/story.html?id=97009251-cf1a-4e5a-b5cc-23803458c5cd

A much longer blog version provides the take of three actuaries on the changes:

http://network.nationalpost.com/np/...9/05/28/the-actuaries-on-the-cpp-revamps.aspx


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## CanadianCapitalist

Most denizens of this forum are probably in the same age cohort as I. I wonder how many changes will occur over the next 30 years to CPP & OAS.


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## steve41

It's funny. I have earlier versions of the tax/cpp/rrsp/clawbacks/gis code. Everyone loves to rant about how much things change for the worse, but when you project using a 10 year old version of the rules, and change the system date back 10 years, you would be surprised how little things have changed.

When you take things like indexing the tax brackets, new dividend tax credit, income splitting, etc... we are definitely farther ahead than if things had stayed untouched.


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## OhGreatGuru

Talk about your basic Doublespeak. Their press releases trumpet increased "flexibility" so it's easier to take CPP early but still keep working. But in the fine print you find out they are increasing the penalty for doing so.

If they really want to reform CPP they should allow people to make additional voluntary contributions, to replace all the employer pension plans that are disappearing.


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## liannagreyson

Very nice post with a ton of informative information. I really appreciate the fact that you approach these topics from a stand point of knowledge and information 
instead of the typical “I think” mentality that you see so much on the internet these days.


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## specialk

More reasons to build wealth on your own and only have this stuff there as a safety net...which after all, was the original intent anyway. Scary how many people rely on this garbage as the only means of retirement. Yes, I know, some people don;t have a choice, but I am mainly talking about people in my age range that don't plan ahead...not because of limitations, but because they don't "feel like it. Life is to be lived for today...go blow your whole paycheck"


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## steve41

FYI, a 65 yr old retired couple who have both worked and achieved full CPP status can look forward to a $34,000 after tax/spending lifestyle.... without having saved a dollar nor acquired a pension.

If they own their home and deferred their property taxes, $34K might not be all that onerous. Of course, staying healthy would be a useful strategy.


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## HaroldCrump

OhGreatGuru said:


> Talk about your basic Doublespeak. Their press releases trumpet increased "flexibility" so it's easier to take CPP early but still keep working. But in the fine print you find out they are increasing the penalty for doing so.
> 
> If they really want to reform CPP they should allow people to make additional voluntary contributions, to replace all the employer pension plans that are disappearing.


Exactly.
I read the title of the post, and went "well, duh, yeah - it's in their interest if most people delay taking CPP."

It's a Tontine scheme for God's sake.

Ottawa wants to increase the penalty making it more and more attractive to delay taking CPP later and later - in the meantime, people will kick the bucket and all the money goes back to the pool.

All those folks who kick the bucket between 60 and 65 or between 65 and 70 hadn't taken CPP benefit the system.
This is all a reflection of increasing life spans, inability of CPP to generate enough returns and general cynicism on the part of the govt.


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## steve41

Here is a tax-accurate explanation for someone deciding to take early or late CPP. It is a fairly straightforward determination..

Taking CPP at 60 or 65


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## OhGreatGuru

Much ado about nothing. There are several pension changes planned, for different reasons. The change for early or late retirement has to do with "actuarial fairness" according to the government's web site, not flexibility. I interpret this to mean that, with current demographics and life expectancies, people taking early pension were getting too good a deal, and people taking late pension were not getting a good enough deal. It is in everyone's interests that the CPP remain actuarially sound, as well as fair. 

Nobody likes change, and the "30% at 60" had been in effect for a number of years. But the effect of the change is that if you still want to take early pension with a 30% reduction, you will have to wait an extra 10 months. Is that such a big deal?


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