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June 20, 2012
Ever since the federal government announced changes to the Canada Pension Plan, Canadians approaching retirement have been trying to figure out how long they should work before starting to collect their CPP benefits.
Retire early and they receive less; retire later and they receive more than before the reform. But it’s not always that simple. A new paper from the C.D. Howe Institute reveals that the size of the gain (or loss) from the new adjustment factors is critically dependent on the receipt of the income-tested Guaranteed Income Supplement benefits.
Individuals receive a full (unadjusted) pension (986.67/month in 2012) if they start their CPP benefits at age 65. For early take-up of the CPP retirement pension, the reduction is increased from 0.5 percent to 0.6 percent for each month between CPP take-up and age 65.
Therefore under the old rules, a 60-year-old would have his full pension cut by 30 per cent ($296). Under the amended rules, this reduction will increase to 36 per cent ($355) once the new downward adjustment formula has been fully phased in over a five-year period that started January 1, 2012.
The flip side is that for later take-up of the CPP retirement pensions, the upward pension adjustment factor will be enhanced from 0.5 per cent to 0.7 per cent for each month for CPP take-up after age 65.
Previously, a 70-year-old would have his full pension increased by 30 per cent ($296). With the CPP amendments, this will change to 42 per cent ($414) when the new upward adjustment has been fully phased in over the three-year period which started January 1, 2011.
However, for an individual who does not have any retirement income other than CPP benefits, every additional dollar in CPP benefits received reduces GIS benefits by 50 cents. This strong interaction between the CPP and the GIS undercuts the value of additional amounts of CPP received by delaying retirement from age 60 to 65 or even longer. The net result is that in these circumstances, early retirement pays higher lifetime benefits than later retirement.
Kevin Milligan, co-author of How CPP reform will affect your retirement choices believes the reforms are a step in the right direction and generally enhance the flexibility of Canadians to work longer without being penalized for their choice. Nevertheless, he says, “On an after-tax basis for Canadians who collect GIS and have no other separate source of income beyond CPP, pension wealth is maximized at age 60, on average, and is reduced from there on.”
The report concludes that the simplest remedy would be to exempt the upward adjustment portion of CPP earned by delaying retirement past age 60 from GIS clawbacks. However, this may not be a politically palatable solution.
Related: Roseman: January CPP changes may affect you