With the release of the Consumer Price Index figure for October, sixtysomethings will have enough information to decide if they are better off starting their Canada Pension Plan benefits in December of this year rather than waiting until 2024. The short answer is, start the pension in December, but read on since there are some exceptions.
If you start taking the pension in December, you will be entitled to an increase in January that reflects inflation. The actual calculation involves taking the average CPI over the 12 months ending October, 2023, and dividing it by the average CPI over the 12 months ending October, 2022. We anticipate that increase will be 4.4 per cent, which is higher than any increase granted since 1992, with the notable exception of last year when benefits went up by 6.5 per cent.
If you wait until January to start join the CPP, you won’t receive the 4.4-per-cent inflationary increase. Instead, the pension will be recalculated using a higher earnings base. It turns out the earnings base for 2024 calculations will be 3.6 per cent higher than if you had started the pension in 2023.
In addition, the starting pension will be adjusted upward by 0.7 per cent (if you are 65 or over) or by 0.6 per cent (if you are under 65) to reflect that you waited another month to start your pension. As a result, your CPP benefits if you started payments in January would be 4.3 per cent higher than if you started it in December. (That’s if you are 65 or over, otherwise the figure is 4.2 per cent.)
A couple of numerical examples may help. Take Audrey, a 69-year-old who is entitled to a monthly CPP pension of $1,000 if she starts payments in December. (Note this is less than the maximum that was payable in 2023 and reflects Audrey’s record of contributions to the CPP.) That $1,000 payment will rise to $1,045 in January. If Audrey instead waits until January, her initial pension will be $1,043. Audrey is a clear winner if she starts her CPP pension in December since the payments are higher (slightly) and she gets one extra payment.
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In our second example, we have Stella who is turning 65 in January. Let’s assume that she is also entitled to $1,000 a month if she had started the pension in December, 2023. As we learned above, this would rise to $1,045 in January. If she waits until January to start payments, the initial amount is $1,042 ($1 less than Audrey).
Once again, she would be clearly better off starting her pension in December, but now there is a caveat. Stella is just 64. If she is like most people who have other savings, she is almost certainly better off waiting until 70 (or maybe 69) to start her CPP benefits in spite of what is going on in 2023 and 2024.
There are several reasons why it’s better for younger retirees like Stella to wait.
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First, this year (and last year) was an anomaly, since price inflation was higher than wage inflation. Normally wage inflation is higher. Over very long periods, wage inflation has averaged about 1 per cent more each year than price inflation. This may not sound like much but it can add up. If this historic relationship between wage and price inflation is restored in future years, then those who wait to start taking their CPP benefits will do better.
Second, the adjustments made to the pensions for starting payments earlier or later than 65 implicitly assume that investment returns will average about 6 per cent. It is like putting your money into a guaranteed investment certificate that pays a guaranteed 6-per-cent interest.
If you are investing your registered retirement savings plan in market-based securities (such as stocks and bonds), your investment return is not guaranteed and could even be negative. Hence, deferring CPP is a way to reduce your investment risk. It is not important if the waiting period is just a month or two (or several), but it becomes quite important over a five-year period.
Third, the higher CPP benefits that you get for waiting longer to start payments will be increased by the inflation rate for life. Thus, delaying the start of your CPP pension is a way of reducing your inflation risk. As we saw in 2022 and even in 2023, inflation risk is still something to avoid to the extent possible.
As a result, my advice to Audrey is to join CPP in December, but Stella should wait until 69 at least, assuming she has enough assets in her RRSP that she can draw from in the meantime. In 12 months’ time, the answer for people in Audrey’s shoes might be different.
Frederick Vettese is former Chief Actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca)
