INFLATION AND CPP
By: Clinton Orr
I recently read an article by Lea Koiv on the advisor.ca website on inflation and CPP. The general consensus is that inflation is one reason you should consider delaying the start of your CPP. To see why let’s dig a little bit deeper into the details.
To start, we need to understand how inflation impacts the CPP benefits in two ways.
The monthly benefit you receive is also indexed, so the amount you receive will naturally be adjusted annually for inflation That adjustment is based on the consumer price index The second impact of inflation is on the Maximum Annual Pensionable Earnings, which essentially is the amount of income you must earn in a year to make the maximum contribution to CPP. That number is adjusted every year based on wage growth, specifically the average of the average weekly earnings in the industrial aggregate as published by Statistics Canada.
In 2020, the maximum annual pensionable income earnings was $58,700, in 2021, it was $$61,600, while in 2022, it’s currently $64,900 If you make more than $64,900 in 2022, you’ve made the maximum contribution to your CPP. This figure is important because it is used in calculating the maximum pension benefit you can receive from CPP. In 2020, the maximum was, at age 65, $1,175.83, in 2021, it was $1,203.75, and in 2022, the maximum monthly benefit is $1,243.75. Once you start receiving CPP, your pension will be adjusted for inflation, prior to taking CPP, the maximum pension anyone can receive will be impacted by inflation
To see how inflation can impact the decision of when you take CPP, a quick refresher on the penalties and bonuses of the CPP program. The start date of CPP is 65, however, you are permitted to take it up to five years early, however, there is a penalty for this. For every month prior to your 65th birthday, your CPP is reduced by 0.6%, so there is a 7.2% penalty for each year you take your pension early That’s a 36% reduction if you take your CPP at 60 If you defer your CPP beyond 65, there is a $0 7 bonus per month, which works out to 8 4% per year, or a full 42% bonus if you defer until 70.
CEO OF RIMBERIO COMPANYIn the piece written by Lea Koiv’s article, she uses an example, Cynthia, an individual who began drawing her person at the age of 60, in January of 2020. Cynthia qualifies for the maximum, $1,175 83, however, since she takes it at the age 60, there will be a 36% penalty and Cynthia will receive $752 53 a month
Often, when deciding when to take CPP the calculator focuses on the penalty. If Cynthia had waited until 61, there would be 7.2 less of a penalty, so her pension would increase by that amount.
However, as mentioned above, the CPP numbers are impacted by inflation
First off, in 2021, Cynthia will get a boost, so instead of $752 35, to adjust for inflation, she will receive extra, getting $760.06. The CPP inflation adjustment for 2021 was 1.0%. Having said that, the maximum CPP benefit will also increase, for 2021 it was $1,203.75. So, if Cynthia waited a year, there would have been less penalty on her CPP and it would be based on a higher number. Since Cynthia qualifies for the maximum $1,203.75, if she decided to collect her CPP in January 2021 at age 61, there would be a penalty of 28 8%, so she would receive $857 07 per month
In my view, taking CPP is a decision that should be made in the context of your personal financial plan and focusing solely on the penalty could be a little misguided. Even then, Lea Koiv’s article shows the true cost of taking your CPP early is larger than just the 7.2% penalty. The cost is also not fixed, historically, the maximum CPP benefit has grown at a faster rate than the inflation adjustment to current CPP benefits So the higher the inflation rate the larger the impact
CEO OF RIMBERIO COMPANYWhen to take your CPP is a personal decision and it should be tailored to your financial plan. In my opinion, the data above shows that considering inflation as a factor in your decision provides some incentive to delay taking your CPP. However, there is more to life than math. When to take your CPP has to make sense for you and should make sense for your situation and your financial plan