## CPP/QPP benefits: To Defer or Not to Defer

By Simiao Zhou, PhD, CFA, Director of Research

Is it worthwhile for a 65-year-old retiree to defer CPP or QPP pension until, say, age 70? If you need the income to cover your basic living expenses, you may not have a choice. Otherwise, deferral increases the pension amount per year by 8.4% (up to age 70), although it also means that you will receive fewer pension payments in total. Without delving into the complexity of an individual’s financial and tax situations, we provide some guidance based on a simple criterion: Does deferral result in a larger dollar amount in total?

To put this into context, consider the case of Sam, who lives in B.C.. Sam turns 65 at the beginning of 2018 and decides to retire. If he collects CPP immediately, Sam will receive an annual amount of $8,303 (the average amount for new retirees in 2018). If Sam waits until age 70, he will receive an increased amount of $11,790 ($8,303 x 1.084 x 5). Once Sam starts to collect CPP, the amount will grow annually with the rate of inflation. Without the loss of generality, we will assume that the inflation rate is zero in this article.

The decision then depends on two factors: Sam’s health and the interest rate (think of it as the expected real rate of return on his investment portfolio). In the following table, we show the total amount that Sam will be collecting under different scenarios:

Consider first the base case of a 0% interest rate and 20 years in retirement. If Sam collects CPP immediately after retirement, he will get 20 annual payments of $8,303, or $166,060 in total. If Sam waits until he turns 70, he will receive 15 annual payments of $11,790, or $176,850 in total. In this scenario, it clearly pays to defer.

How will a different interest rate change the analysis? If the interest rate is 2%, a dollar today is no longer a dollar in one year. Instead, it will be worth 1.02 dollars. Conversely, a dollar in one year is worth 98.04 cents today (i.e., the present value of a dollar next year is 98.04 cents) if the interest rate is 2%. Therefore, if Sam collects CPP immediately, the 20 payments of $8,303 are equivalent to $138,481 today, when he is 65. The deferral option entitles Sam to 15 payments of $11,790, which amount to $139,956 today. Therefore, with a 2% interest rate, Sam is still better off deferring his CPP pension.

We calculate the break-even interest rate to be 2.3845%, at which the equivalent sum is $133,981 today regardless of Sam’s choice. This means that if the interest rate is above 2.3845%, Sam is better off collecting CPP immediately.

How does Sam’s health condition affect the preceding analysis? A 20-year period in retirement is about the life expectancy of a 65-year-old Canadian, but it will vary across individuals. If Sam expects to live for more than 20 years, he is better off waiting until age 70, because he collects a larger amount long enough to make up for the forgone pension between 65 and 70. That is the third scenario in the table. Conversely, if Sam expects to live for less than 20 years, he is better off collecting CPP immediately.

In the “Planning” section of Wealthscope, you can consider whether to collect CPP (and OAS) at the same time you retire or whether you want to defer, and see the impact of the decision on your retirement plan. In terms of the interest rate, you can choose different investment portfolios in the calculations, and again see how it affects your plan.