When should employees apply for CPP?

By Alan McEwen

Every person working in payroll or HR has, at one time or another, been asked this question: “When is the best time for employees to start collecting CPP retirement benefits?”

These benefits are payable at any time after age 60, so employees need to decide whether these benefits should be taken as early as possible, at age 65 or delayed to age 70.

People in payroll or HR should have a clear understanding of the factors that affect employee retirement pensions, taken early or delayed past age 65. And HR or payroll staff should be able to explain these clearly to employees, when asked.

However, I would not recommend that anyone in payroll or HR give specific advice to an employee looking for help in deciding when to apply for CPP. Beyond the factors described below, it's best to refer employees to Service Canada's website, where there are tools to help employees estimate their expected CPP retirement benefits. See www.servicecanada.gc.ca/eng/isp/common/cricinfo.shtml.

The main factor that should influence an employee's decision to take CPP, meaning regular retirement benefits, is the person's own judgment of life expectancy. There are a variety of penalties and rewards for taking the CPP either early or late. These are too complex to describe in detail here, but the gist of it is employees are penalized 0.6 per cent per month for each month they take CPP before age 65 and rewarded 0.7 per cent for each month between age 65 and 70, that they delay taking these benefits. The following table describes the total amounts payable, assuming a monthly CPP retirement pension of $1,000:

These numbers should only be taken as rough estimates, because they do not provide for interest (present value), increases in CPP owing to inflation or for the impact of the new post-retirement benefit. But the basic point remains clear. The shorter a person's life expectancy, the earlier benefits be started. By contrast, if employees expect to live well past age 75, they should probably plan for taking CPP as late as possible.

What this table also shows is if CPP will be the main source of income after retirement, apart from any Old Age Security or Guaranteed Income Supplements, employees should probably delay taking CPP as long as possible. There is an obvious, quite large difference between a monthly pension of $640 and $1,420.

The other main factor employees should consider is the likely pattern of their pensionable earnings after age 60. Regular pensionable earnings are based on a monthly average of the earnings from age 18 until the earlier of age 70 and the start of CPP retirement benefits. The earnings in the months between these two dates are divided by the corresponding number of months.

It's not quite as simple as that, since there are also adjustments for months where employees have been out of the labour force, such as while raising a family. But the point remains that regular pension benefits are based on a monthly average of pensionable earnings. If an employee expects that earnings after age 60 will fall significantly below this average, this may lower an employee's monthly CPP benefits. The CPP rules do allow some low-earning months to be excluded from this calculation, so it's not possible to know, without more detailed knowledge of an employee's work history, how reduced earnings after age 60 will affect monthly CPP benefits.

Example: Peter started working in pensionable employment, the month following his 18th birthday. Peter will be 60 in 2014 and would like to reduce his hours of work to three days a week from five, with a corresponding reduction in salary. Peter wants to know how this phased retirement will affect his retirement benefits, specifically, whether he should take CPP at age 60 or wait until age 65, when an unreduced pension will be available. If Peter delays CPP to the month following his 65th birthday, there will be 564 months in the period used to determine his monthly pension (65 minus 18, times 12). The rules allow 17 per cent of these months to be excluded, meaning 96 months of below average earnings (564 at 17 per cent, rounded up). Whether the 60 months of phased retirement, from age 60 to age 65, will lower Peter's monthly CPP depends on the pattern of Peter's pensionable earnings in the other 504 months from age 18 to age 65.

Peter must also consider the penalty, described above, for taking CPP early, rather than at age 65. In other words, any reduction in his pension benefits, from reduced earnings during his phased retirement, may be offset by waiting to age 65 and avoiding the penalty for taking CPP early. By contrast, by waiting to age 65, Peter would give up the post-retirement benefit payable on his earnings from age 60 to 65. Since any post-retirement benefits earned in these years continue being paid long after, they can significantly increase his total CPP benefits.

You can readily see how complex a decision on taking CPP can become. Payroll, or HR, should not provide employees with more than general information on how the factors described above will impact CPP benefits. Only the employee may have the information required to properly assess these factors and assessing them involves subjective judgments, such as on life expectancy, that should be solely the employee's responsibility.

Alan McEwen is a payroll consultant and freelance writer with 20 years' experience in all aspects of the industry. He can be reached at armcewen@cogeco.ca, (905) 401-4052 or visit www.alanrmcewen.com for more information.