For anyone thinking of starting their CPP pension soon, this is the time of year when we find out the exact optimal starting date. With three months left in 2024, we now have enough information on this year’s wage and price inflation to make a call on how much CPP pension will be payable in 2025.
CPP increases annually but how it increases depends on your payment status. Before you start receiving it, your CPP benefit grows with wage inflation. That is because the CPP earnings ceiling on which your pension is based rises in line with the increase in the average national wage. Once you start your CPP pension, however, future increases are based on price inflation. Wage inflation normally differs from price inflation.
In some years, like in 2022, price inflation exceeds wage inflation and that year it was better to start CPP in December versus January. In 2024, however, price inflation for CPP purposes is 2.7 per cent while wage inflation is about 4 per cent. This suggests that it is better to start CPP in January rather than December. Now let’s test this.
The chart below shows the cumulative amount to be paid out in future years to someone who is turning 65 this coming November. If they start their CPP in December, and receive the maximum, their first monthly payment would be $1,335. The question then is how long does it take to catch up if one starts their CPP pension in January instead? As the chart shows, the late-starter overtakes the early starter by early 2029. After that, the gap between them gradually widens.
This analysis should be useful to anyone who is hellbent on starting CPP imminently, whether they are 60, 65 or 70. In general, I still recommend waiting as long as you can to start CPP for the reasons given in my book, Retirement Income for Life.
This analysis is based on future inflation, starting in 2025, of 2.1 per cent a year but the same result would be obtained with a higher or lower inflation rate. For simplicity, only the basic CPP benefit (25 per cent of the final average year’s maximum pensionable earnings, or YMPE) is calculated here. This ignores a small additional amount of CPP benefit owing to the expansion of the program that started in 2019, but that would not have changed the conclusion.
Frederick Vettese is former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca)
