Canadians can get 42 per cent more money each month if they defer receiving CPP benefits until age 70. But taxes and other considerations weigh on the payments.Sean Kilpatrick/The Canadian Press
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I used to think I was no good at math. But the truth is, it’s math that’s no good. Math is bad. In fact, it’s evil.
Need proof? Just ask yourself: What gave rise to all the potential apocalyptic horrors of nuclear war? E = MC², that’s what – the arithmetic progenitor of “The Bomb.”
Recall also how the genial Dickensian character Mr. Micawber was undone and bound off to the penal colonies by two life-altering equations:
Income X – Expense (X – 1) = Happiness
Income X – Expense (X + 1) = Misery
Yes, math is wicked and cruel. But nowhere is its vile nature more evident than in the seductive proposal it makes to all of us on our 65th birthdays: Defer receiving your Canada Pension Plan (CPP) benefits until age 70 and you’ll get 42 per cent more money each month.
Wow, that sure seems like a great deal. Imagine what an extra 42 per cent could buy. A lovely annual vacation, a theatre junket, or some fine restaurant meals. All these nice lifestyle upgrades can be yours if you just wait a bit.
But is this tempting arrangement truly real?
I asked my accountants and financial advisors, who confirmed it and strongly recommended the deferral. They said it was a smart thing to do because it works out to a lot more money in retirement. I should have known, though, that accountants and bankers couldn’t be trusted. Theirs is a calculating world, and they really all work for Big Math.
What they don’t tell you, and hope you’ll fail to notice, is the fact that you won’t break even on this deal until the extra 42 per cent makes up for the five years of payments you’ll forego from age 65 to 70.
So, let’s assume your combined CPP and Old Age Security is $1,750 a month, or $21,000 a year. Deferring that pension for five years means you’ll give up $105,000 ($21,000 x 5 = $105,000). How long will it take for the extra 42 per cent to equal that amount?
Forty-two per cent of $21,000 is $8,820. Divide $105,000 by that amount and you get a little more than 11.9 – that’s the number of years it will take. In other words, you’ll have to wait until you’re almost 82 years old before the deferral finally begins to pay off.
Oh, sorry, we forgot to consider taxes. As you might expect, the amount of taxes payable on an income of $29,820 (the $21,000 pension boosted by an extra 42 per cent) is more than the taxes due on $21,000. How much more depends on the province or territory where you live, but it’s a $2,180 difference on average. That differential means it’ll take longer for the deferred pension to catch up. So, on a net after-tax basis, you’ll only reach the break-even point at 84 years old.
Also, it should be noted, we didn’t take into account how much money you could have made by investing the forgone payments. At a modest return of just 3 per cent a year, compounded, you’d have an additional $68,640 by the time you’re 84, which would push your break-even point to about 86-and-a-half-years-old.
Statistics Canada has a word to describe the average 86-and-a-half-year-old Canadian: Dead. That’s because the average lifespan in this country is just 82.7 years. It’s a bit longer for women, and longer still for those women who manage to reach 65, but even their life expectancy is only another 20.8 years. Statistically speaking, therefore, at 65 no one can expect they’ll get to see their CPP bonus payday.
But wait a minute. Aren’t there a lot more people living past 90 and even to 100 these days? Yes, but they’re still atypical. Only about one-third of seniors live to be 90. So, if you’re turning 65 and wondering what your chances are of making it to that age, the odds are stacked 2-to-1 against you.
For comparison, you have a better chance of beating the blackjack dealer in a casino, where gaming rules always give the house a slight advantage that statistically guarantees you’ll lose the longer you play.
So, think carefully when deciding whether you’ll play the long game of deferring your CPP. But please don’t rely on what I’ve written here. My assumptions may be faulty. My math could be bad.
Like all math.
Neil Gross is president of Component Strategies, a capital markets policy consultancy in Toronto.
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