HOOPP has been a long-standing advocate for improved retirement security in Canada and we conduct research to help inform the national dialogue on this important issue. We are pleased to find like-minded thinkers who contribute their perspectives to this dialogue. Today, the NIA has released the first paper in a new eight-part series about how financial services and policy makers can help Canadians make informed decisions to maximize their Canada/Quebec Pension Plan (CPP/QPP) income. The paper, Introduction: Opportunities and Obstacles to Shifting the Paradigm, gives an overview on why most Canadians start their CPP/QPP at 65 and the areas of opportunity to help shift their thinking about retirement planning.
Could some Canadians be better positioned for retirement by waiting to claim their CPP/QPP?
The paper notes that starting CPP/QPP after the age of 65 can increase payments significantly, especially if they wait until 70 years old when their monthly pension could more than double what it would have been if they began collecting at 60. These higher payments are for life and indexed to inflation. So, why do most Canadians take it at 65?
Retiring late and delaying CPP/QPP may not be an option for everyone depending on their specific personal and professional circumstances. However, for those who are able to do so, the paper makes an intriguing argument in favour of using informed decision-making, catering to human psychology and behaviour, and placing emphasis on long-term financial planning to shift the current paradigm.
This shift is especially important in the context of the Canadian retirement system which is based on three important pillars working together to secure Canadians’ retirement incomes: personal savings, workplace retirement savings arrangements, like HOOPP, and government programs, like CPP/QPP.
However, not all Canadians are able to access all three pillars. In the latest Canadian Retirement Survey, almost half (44%) of non-retired Canadians aged 55-64 reported having less than $5,000 in savings. Coupled with the fact that the majority of Canadian workers do not have a registered pension plan through their employer, the importance of government programs become all the more critical. In fact, according to NIA’s paper, 90% of recipients say their CPP/QPP pension is an important source of their retirement income with 60% saying they can’t live without it.
We believe the paper’s ideas provide an interesting perspective to the national retirement security dialogue. We are pleased to share the series, 7 Steps Toward Better CPP/QPP Claiming Decisions: Shifting the paradigm on how we help Canadians, as new papers are released throughout the rest of the year.
Take the time to download and read the report here.
It is written by Dr. Bonnie-Jeanne MacDonald and this is what it's about:
More than a thousand Canadian baby boomers are making the CPP/QPP claiming decision every day. An overwhelming majority (9 in 10) choose to claim benefits by age 65, whether due to natural human bias, general lack of awareness of how CPP/QPP programs work or common financial planning practices.
The financial incentives to delay claiming are substantial, and their choice will affect them for the rest of their lives.
In the first release of this series, Dr. Bonnie-Jeanne MacDonald, Director of Financial Security Research for the NIA, explains why people claim these benefits earlier than they should, why better claiming behaviour is important, the obstacles to progress and what a paradigm shift would look like.
Let me repeat this because it's extremely important:
Benefit levels are adjusted according to the recipient’s age when payments start, and the financial incentives to delay claiming are lifelong and substantial. By waiting until age 70 to claim benefits, Canadians can receive more than double (2.2 times) the monthly pension than if they had claimed them at age 60. These higher payments last for life and are also indexed to inflation.
That’s why, for most people who are looking to maximize their lifetime retirement income and can afford to wait – either by drawing on personal savings or working longer – choosing to delay claiming CPP/QPP benefits for as long as possible is one of the safest, most inexpensive ways of increasing lifetime pension income, bringing with it greater protection against low investment returns, high inflation, and the anxiety of potentially outliving their savings.
But despite these advantages, an overwhelming majority (9 in 10) choose to take their CPP/QPP benefits by age 65, reducing the lifetime income security they say they want and will most likely need. This disconnect between the needs and wants of retiring Canadians and their behaviour points to the importance of shifting the paradigm within which this high-stakes, complex decision is made.
The report highlights one of the key steps to delay CPP/QPP benefits to increase lifetime pension income is to draw on personal savings in early retirement as an income bridge to a higher delayed CPP/QPP benefit:
This strategy offers higher returns (how much money can be expected) and better protection against financial risk (the chance that the future will not work out as expected) than holding onto Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) savings if the intent is to use those savings to increase retirement income. For example, MacDonald et al. (2020) found that nearly 4 out of 5 Canadians with RRSPs/RRIFs would get more lifetime income from using a portion of those savings as an income bridge rather than stretching out their RRSP/RRIF withdrawals over the span of their retirement. Even for individuals motivated by the prospect of a large savings account and not concerned about protecting themselves against future financial risks, deferring CPP/QPP is attractive when understanding the long- term view. For example, MacDonald (2020) found that a Canadian with the median CPP income and average life expectancy is losing out on over $100,000 worth of secure lifetime income, in current dollars, by taking CPP benefits at age 60 rather than age 70. In this scenario, delaying benefits amounted to a 50% increase in their total lifetime CPP/QPP income.
That's a huge difference in secure lifetime pension benefit income!
Of course, to draw on personal savings in early retirement as an income bridge to higher delayed CPP/QPP benefits, you need to have significant savings, a decent cushion.
The report goes on to state most Canadians can afford to bridge the income gap by working longer and/or drawing on personal savings:
Building on Statistics Canada’s sophisticated Lifepaths Population Microsimulation model, MacDonald (2020) retrospectively looked back a decade, and found that most recipients (53%) could have afforded to delay claiming their CPP/QPP benefits using only a portion of their registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) to bridge the income gap. Canadians who are motivated to increase their secure lifetime income can also delay taking CPP/QPP without affecting their living standards by drawing on other savings outside of RRSPs/RRIFs and/or working longer, which increases the proportion of those who can afford to delay. A survey conducted by Retraite Québec in 2021 examined this question directly: approximately 4 out of 5 QPP recipients who claimed benefits at age 60 said they could have afforded to delay (Retraite Québec, 2022).
Delaying your retirement however really varies on your circumstances.
My father fully retired as a clinical psychiatrist at the age of 90 (partially at 85) after 50 years of working hard and is still in relatively good health at 92 so he is enjoying the maximum QPP/QPP.
But he's the exception, most people retire a lot earlier for a whole host of reasons, health and wellbeing often being the number one reason.
So, I agree, if delaying retirement by 5 to 10 years is feasible, you should absolutely do it, but you will need savings no matter what to delay collecting CPP/QPP benefits till 70 to maximize your benefit payments.
And note this passage in HOOPP's press release:
However, not all Canadians are able to access all three pillars. In the latest Canadian Retirement Survey, almost half (44%) of non-retired Canadians aged 55-64 reported having less than $5,000 in savings. Coupled with the fact that the majority of Canadian workers do not have a registered pension plan through their employer, the importance of government programs become all the more critical. In fact, according to NIA’s paper, 90% of recipients say their CPP/QPP pension is an important source of their retirement income with 60% saying they can’t live without it.
Sadly, most retired Canadians relying solely on CPP/QPP as their only source of income are not getting by, and many are turning to food banks:
‘Why am I getting so little pension?’ Quebec woman turns to food bank, can’t make ends meet | https://t.co/l3OctQRAoXhttps://t.co/n7QipdRuE4
— Leo Kolivakis (@PensionPulse) April 3, 2024
Yes, she probably also collects Guaranteed Income Supplement (GIS) but it's still not enough to make ends meet.
This is the harsh reality of pension poverty and the truth is we simply cannot expect Canadians struggling with high inflation to a) save adequately and b) properly invest their retirement savings.
Hell, I have smart friends working in finance and other fields and we have debates every day on markets and whether (for example) now is a good time to buy Bell Canada (BCE) and collect a big fat 9% dividend as the stock keeps sinking to a new 5-year low:
These are all great arguments to own the stock but a stock that keeps making new 5-year lows is making them for a reason and if inflation expectations pick up and rates soar even higher in the second half of the year, all dividend stocks including Canadian banks will feel the pain.
So, sitting on BCE shares collecting a 9% dividend sounds great but if the stock keeps losing capital, your savings will dwindle and you'll be hoping it comes roaring back in time.
I'm being a bit too quick here covering the pros and cons of owning Bell and other dividend stocks but my point is even experts have sound disagreements.
And investing in these markets is NOT easy.
This afternoon, all of a sudden, I noticed shares of a US insurer Globe Life getting clobbered after a short seller Fuzzy Panda Research disclosed a short position in the company, alleging multiple instances of insurance fraud:
This is an insurance company for Pete's sake! I can guarantee you at 3 p.m. this afternoon, elite hedge funds were snapping up shares as other investors panicked and dumped them.
After the close, the company issued a statement to refute the short seller's allegations but by then, the damage was done.
Now, don't go out to buy this stock tomorrow without understanding the risks as I expect more volatility, but my point is these are crazy markets, things can shift on a dime and we expect unsophisticated investors to make informed decisions?
It's literally like sending sheep out to the slaughter!
Trust me, I know, I trade biotech shares most people never heard of and see crazy volatility every week and even day!
And wait till this whole AI bubble bursts and sends the entire market tumbling hard, then the panic will really set in.
Anyways, my point in all this is that now more than ever, Canadians need to be better educated on retirement decisions and if possible, we need to cover more of them with a well-governed defined-benefit planthat pools investment and longevity risks.
If we don't, pension poverty will accelerate over the next decade, I guarantee it just like I guarantee more homelessness in Canada if our policymakers at all levels of government don't cut regulations and significantly boost the supply of homes (not just condos but single family homes).
Alright enough of my doomsayer opinions, I leave you with the report's conclusions:
Once again, take the time to download and read the report here.
Also, take the time to read all of HOOPP's advocacy research here, it's well worth it.
Lastly, Rick Hansen, founder of the Rick Hansen Foundation, posted an article on Linkedin yesterday on how a survey finds 'overwhelming support' for disability benefit complicated by slow implementation.
That prompted me to reply with another article I had read last year about a retired nurse in Ontario, Una Ferguson, giving her disabled son Scott between $500 and $600 a month for essentials such as food and clothing.
Scott receives $1,197 a month from the Ontario Disability Support Program (ODSP) which isn't indexed to inflation, with $497 of that supposed to go to rent.
Una worked until she was 73 to maximize her own retirement benefits so she could continue to help him out.
And she is lucky her pension is managed by HOOPP and she can count on it as long as she's alive, others with disabled children they are looking after aren't as fortunate so I do hope the federal government stops dithering and implements Bill C-22 and all parties stand behind it to lift thousands of disabled Canadians out of poverty for good.
That's another important issue policymakers need to take care of but I doubt it will be in the federal budget next week (don't get me started).
Below, Tony Clement recently welcomed back Stephen Poloz former Governor of the Bank of Canada, for a Prescient & Pressing Finance and Economic discussion on his Boom and Bust show.
Take the time to listen to Steve's insights on the age of uncertainty and what it means for policymakers implementing retirement and other policies and also see a previous comment of mine in why it's time to expand the CPP again where I share more of Steve's wise insights on retirement security.