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The Role of Inflation in the Decision to Start CPP: Maximizing Retirement Income Thumbnail

The Role of Inflation in the Decision to Start CPP: Maximizing Retirement Income

Retirement Planning

With all of the negative connotation around inflation, we wanted to highlight a planning area where inflation actually improves a situation – the decision on when to start taking CPP! This content will be a great value to those that are approaching or just started retirement, and have not yet started collecting CPP. The content is a little heavy, but bare with us, as the financial outcomes can be extremely beneficial. This newsletter is based on research and content provided by Lea Koiv, columnist for Advisor’s Edge.

Many don’t realize it, but inflation actually plays an important role when deciding on when to start taking CPP payments. Let’s dive into it.

First, let’s look at how CPP payments are actually calculated. This is rather complex, so we will summarize it in the best way possible. In essence, there are two forms of inflation that are used as inputs when inflation is calculated.

Consumer Price Index (CPI): This takes and measures the average basket of consumer goods and services purchased by households in a given period. CPI gets updated on Jan. 1 of every year. For 2020 through 2022, CPP payments increased by 1.9%, 1.0% and 2.7% respectively. To put it simply, higher the CPI = higher CPP payments (Koiv 2022).

Year’s Maximum Pensionable Earnings (YMPE) and wage inflation: YMPE is an annual earnings amount to which CPP contributions are based. The YMPE for 2020 was $58,700. It increased by 4.94% to $61,600 in 2021 and by another 5.36% to $64,900 for 2022 (Koiv 2022). These increases are based off of wage inflation. This means that an individual would contribute to CPP when they make $64,900 or less. Any income earned above this amount would not result in CPP contributions. With a higher YMPE, more contributions to CPP are made.

Now, there are additional ways that can reduce or increase your CPP payments.

Reduced CPP payments: Your max CPP payment is based on you taking it at age 65. However, you are able start drawing it as early as age 60. The caveat to taking CPP early is that for every month earlier than 65, your payment decreases by 0.6%. So, if you decide to take it at age 60, your payment would be 36% lower than it would be at age 65.

Increasing CPP payments: On the flipside, if you delay taking CPP after age 65, your payment increases by 0.7% per month. The latest that you can defer it is age 70. A full deferral of CPP until age 70 would result in a 42% increase.

For the decade ending in 2018, the average age people opted to start CPP was 62.5 (Koiv 2022). Now that inflation is increasing, this makes the question to defer CPP much more significant. Could it be more beneficial to draw down your personal assets between 60-70 and guarantee an increased stream of income at 70 with an enhanced CPP payment?

The table below outlines a scenario where our fictitious client Cynthia took her CPP at age 60 (earliest). Her payment would have been reduced by 36% - remember the reduction above? In this case she would have received $1,175.83 per month at age 65, but is now receiving $752.53 per month at 60. This amount ($752.53) is indexed each year.

But what would if she delayed taking it? If she waited one year later (2021), her payment would have been $857.07 pe month (early discount is 28.8% on the 2021 max of $1,203.75). Note that the 2021 max $1,203.75 is larger than 2020 due to the increases mentioned earlier. But, since Cynthia took her CPP at age 60, only $752.53 is indexed by 1%. This process repeats itself every year until age 70, and the difference becomes bigger and bigger.

Source: Lea Koiv.

Note 2: Maximum CPP retirement pension based on actuals for 2020 through 2022 and 3% increases thereafter

Note 1: Amount indexed each January 1 for CPI increases (actuals for 2021 and 2022 of 1.0% and 2.7%, respectively; 2% thereafter

If Cynthia delayed taking her CPP until age 70, her payment would have been approximately 199.65% larger!

If you you’re still reading you’ll notice that Cynthia’s decision was a disadvantage to her (assuming she had other assets to draw from).

There are, of course, situations in which waiting to start drawing the retirement pension may not be appropriate. Some examples include someone receiving CPP survivor benefits, those facing the OAS clawback, and those in poor health.
 
Still not sure whether deferring CPP makes sense in your case? Contact us to discuss further with an advisor!