New study from National Institute of Ageing finds shortfalls in advice cause Canadians to take benefits too early
Canadians who collect their CPP or QPP benefits at age 60 are making a costly long-term decision, according to a new report by the National Institute on Ageing at Ryerson University and the FP Canada Research Foundation.
Based on actuarial age-adjustment factors and non-enhanced CPP benefits, the report said an average Canadian who receives the median CPP income forfeits more than $100,000 of secure lifetime income, in current dollars, by opting to take benefits at age 60 rather than age 70.
“From a lifetime perspective, the total amount of CPP/QPP income that an average Canadian will receive over the course of their retirement is over 50% more by delaying CPP from age 60 to age 70,” according to the report.
Even putting off getting their benefits by one year provides substantial value, equivalent to investing a single year’s CPP/QPP benefit at age 60 for which the recipient will get a lifetime pension income equivalent to 11.25% of that initial investment.
“If Canadians were to use the equivalent of those forfeited CPP/QPP payments to buy such a pension in the retail marketplace, the resulting annuity payments would be 40% lower for a man and 50% lower for a woman,” the report said.
In most cases, the cheapest and least risky way to maintain secure income over their retirement by delaying CPP/QPP benefits past age 60, which the report said the majority of Canadians can do. But it said retirement financial planning practices are pushing Canadians to cash in their CPP/QPP benefits too early.
Citing a recent poll by Employment and Social Development Canada, the report said over two thirds of Canadian near-retirees or retirees do not understand that they can increase their monthly pension payments simply by waiting longer to collect them.
Among those who seek out retirement planning advice, the report cited a mainstream practice using a so-called “breakeven age” to guide CPP/QPP claiming decisions. By telling people that they stand to get ahead if they collect benefits at age 60 and don’t live past 80, for example, the report said such advice “distorts the actual risk/return proposition” and “pushes people to mentally gamble their subjective life expectancy against the ‘breakeven’ age.”
Another root cause is the “insufficient information and poor advice” that encumbers retirement financial planning paradigms. Professionals, relatives, or close friends who flippantly offer statements such as “a bird in the hand is worth two in the bush,” the report said, feed into retiring Canadians’ concerns about drawing on their savings, lack of understanding of CPP/QPP rules, and desire for immediate gratification, among others.
Also cited were potential conflicts of interest that can motivate dangerous advice. For instance, the report argued, early collection of CPP/QPP benefits is a form of indirect compensation to advisors and managers: the longer they can keep the assets they manage for a client whole, the greater the trailing fees they can collect.
“Heirs may also act opportunistically to preserve their expected inheritance by advising early uptake,” the report said.