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opinion

The Canada Pension Plan contains endless subtleties that can trip up even the experts from time to time. My usual advice, to defer CPP until age 70 to get the most out of the plan, doesn’t work in 2022, at least not for seniors who are closing in on 70. The problem? High inflation coupled with mediocre wage gains.

By now, most older Canadians know that they can wait until age 70 to collect CPP (QPP in Quebec). At least some also know that their CPP pension would be adjusted upward by 42 per cent if they wait until 70.

Almost no one knows – and this includes many actuaries and financial planners – that the actual adjustment is not really 42 per cent; it will be more or less, depending on how wage inflation compares with price inflation in the five years leading up to age 70. It turns out this arcane fact is crucial. The usual reward for waiting until 70 to collect CPP is that the pension amount ultimately payable is typically much greater than if you had started your pension sooner, such as at age 65. In 2022, that won’t be the case. As we will see later on, someone who is age 69 in 2022 and who was waiting until 70 to start his CPP, is much better off starting it this year instead.

At the heart of the issue is what happens during the five-year deferral period, from age 65 to age 70. During that time, the pensions of those who defer CPP is increasing each year by wage inflation, because the CPP earnings ceiling is still growing and it is based on wages, not prices.

By contrast, the pensions of people who started to collect at age 65 increases each year by price inflation. Historically, wage inflation outstrips price inflation by about one percentage point a year, though that is just a broad average. The actual differential can fluctuate wildly and can even be negative.

I have long advocated that deferring CPP to age 70 is advantageous for many if not most CPP participants. My position is based on the expectation of a 42 per cent “bump” in pension at 70. When the actual bump is better than 42 per cent, it makes deferral just that much more advantageous.

The accompanying chart shows what the actual improvement in CPP pension would have been for retirees who turned 70 between 2009 and 2023. If we ignore 2023, the payoff for deferring has consistently been better than 42 per cent.

What is a surprise is just how much better deferral was in some years. The people who reaped the greatest reward are those who reached age 65 in 2009 and elected to defer their CPP until age 70 in 2014. They got 54.9 per cent more pension at 70 versus the expected 42 per cent. In general, anyone who reached 70 in any year from 2012 to 2016 got at least 50 per cent more by deferring.

The chart also reveals a major surprise on the downside, one which may lead some readers to take immediate action. It shows that the actual increase in CPP at 70 versus 65 will be just 37.9 per cent for people who turn 70 in January, 2023. (This assumes the CPP earnings ceiling in 2023 will be $66,500, a good bet).

While that isn’t much below 42 per cent, it is enough off to change the usual advice to defer. Those who are most directly affected are people who are over 65 and have not yet started to collect their CPP pension.

Take Wade for example. He turned 65 in 2018, when he was entitled to a maximum CPP pension. Wade has always planned to start collecting his CPP pension in 2023 when he turns 70. It turns out that Wade could receive $21,194 a year in 2023. But wait.

If Wade had started to collect his CPP at Jan. 1, 2022, instead, the amount payable would have been $19,940. In addition, Wade would be eligible for the CPI increase given to pensions in payment on Jan. 1, 2023, and this would raise his 2023 pension to $21,196. I am assuming the year-over-year inflation figure as of this October will be 6.3 per cent; it has been significantly higher than that for the past few months.

At first blush, it looks like Wade gets virtually the same pension in 2023 if he starts his CPP in 2022 or in 2023. The difference is that if he starts it in 2022, he is ahead by $19,940, his 2022 pension. A second difference, not shown here, is that Wade, who continues to work, would no longer have to contribute to the CPP if he starts collecting in 2022. This could save Wade another $7,000 if he happens to be self-employed with earnings of at least $65,000. In short, Wade has no reason to wait until age 70 to collect CPP.

If we replace Wade with Katherine and assume she is 66 instead of 69, the same result will probably hold true. I say “probably” because there is more time until Katherine hits age 70 for economic factors to regain equilibrium.

Does this mean that deferring CPP beyond 65 is no longer advisable? In general, it will tend to remain the best option for many but, as we saw with Wade, one will have to be careful.

In a way, 2022 is the exception that proves the rule. It is the result of COVID, a once-a-century event, creating a one-year spike in price inflation without a corresponding one-year spike in wage inflation. This analysis, by the way, has no bearing on when to start collecting the OAS pension.

This should send an SOS to financial planners and accountants, as well as retirees who take a DIY approach. Deferring CPP will usually continue to make sense but not necessarily in times of economic upheaval.

Frederick Vettese is former chief actuary of Morneau Shepell and author of Retirement Income for Life.