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You can still benefit from deferring Canada Pension Plan payments with less than maximum contributions.
Do all the advice articles about waiting to take CPP at age 70 take into account the calculation of your eligible amount if you stop working and contributing at, say 60 years old, and therefore have 10 years of no contributions?
–Gary
An applicant can begin their Canada Pension Plan (CPP) retirement pension as early as age 60 or as late as age 70. The earlier you start your pension, the lower your payments. Deferring CPP will result in higher monthly pension payments, albeit for a shorter period of time—fewer total months of payments—over the rest of your life.
If someone retires at age 60, Gary, their CPP contributory period that began when they turned 18 could be as much as 42 years. I say “as much as” because periods of disability or when your income was low because you were the primary caregiver for your children may be eligible to drop out from the CPP calculation.
This contributory period is important because if you do not make the maximum contributions during this period, you will generally not receive the maximum CPP retirement pension.
Most people do not receive the maximum. In fact, the average monthly CPP retirement pension payment at age 65 as of January 2024 was only $831.92, well below the maximum of $1,364.60. That means the average applicant is receiving less than 61% of the maximum.
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There is a general dropout period from the CPP calculation of 17% of the years in your contributory period, which would be about seven years at age 60 for someone with no periods of disability or child-rearing eligibility. Let us build on this example, Gary.
If you are 60 and defer CPP to age 61 while not working, this may result in one more year of zero contributions and a contributory period (after the general dropout) that increases to 36 years. One divided by 36 equals about 2.78%. That could be the reduction in your CPP for deferring while having no income.
However, deferring CPP results in a 0.6% monthly increase in your pension, or 7.2% per year. This is regardless of your contributory period.
So, in our example, a year of deferring results in a 7.2% deferral increase but a 2.78% zero-income decrease. The net benefit is still a 4.42% increase in your pension plus the annual inflation adjustment.
A year of no income for someone with less than the maximum required contributions between 60 and 65 does have a small negative impact on the benefit of deferring, Gary. But deferring still results in a higher pension in this example.
If you defer CPP past age 65, you can drop up to five additional years from your contributory period for the years between 65 and 70. That means years with no earnings after age 65 will not impact your retirement pension when you defer after age 65.
CPP deferral after age 65 will boost your pension by 0.7% per month or 8.4% per year plus an annual inflation adjustment. Statistics show few people defer CPP after age 65. Generally, in recent years, less than 5% have waited until age 70.
Ultimately, CPP timing should be a somewhat personal decision based on contributory history, life expectancy, investment risk tolerance and, of course, income needs. Healthy seniors, especially women (who tend to live longer than men) and those with a lower investment risk tolerance, may benefit from deferring CPP.
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On the other hand, if you don’t need it, could you not still collect it, invest it, even in GICs or bonds and be ahead of the game rather than deferring it?
Hi Jason
Great article! I found your comment on the zero income decrease of 2.78% interesting. I never considered that in my calculations. I retired at 60 (currently 63). I have not taken my CPP yet. I contributed the maximum for 38 years and missed the maximum by $300 in my 39th year. I know 39 years of contributing the maximum is the threshold for receiving the absolute maximum. Will my $300 shortfall in my 39th year of contributions have much of an impact on my zero income decrease? I would think no.
Cheers, Brian
I would say the ladies should delay until age 70 as their odds of collecting the higher amount for a couple decades are much higher than the gents. And this would apply if you’re suffering from other chronic illnesses that reduce your lifespan (on average) there is no point in waiting until 70 if you die when you’re 74 as many working class men will.
Once upon a time there lived an evil boss.
One day he said to his 60 yr old employees …
“I know you’ve worked hard and are entitled to your pay cheques,
but I have an idea …
I’ll keep all your cheques for the next 10 years.
You can use your savings to support yourselves until you’re 70.
When that day comes, if you’re still alive, and I’m still around,
I’ll begin to send you your cheques, plus a little interest.
If you’re too sick to enjoy your money – oh well, that’s life.
If your kids ask where their inheritance went,
just tell them you loaned it to me – they’ll understand.
Any takers?”
And the boss lived happily ever after.
The good news is, only 5% of Canadians have drank the Kool Aid,
and they can still correct their mistakes and start to collect their money.
The bad news is, the people we trust to protect our seniors from scammers,
are the very ones doing the scamming.
“… and I think to myself, what a wonderful world.”
Getting an extra 42% of guaranteed income (no chump change) by deferring until age 70 makes this an attractive option. For me it’s about reducing investment risk and longevity risk – suppressing the unknowns (i.e. sleep-well-at-night). For reference, a 65 year-old male has a 50% chance of making it to age 89.
Everyone’s situation and decision is different, but for me and likely for many, the decision is a no-brainer.
By the way, here is an excellent Youtube from a Fee-based advisor – not the usual Financial Planner whose best interest is to have you take CPP early so that they benefit from continually milking your investments……youtube.com/watch?v=Zff2zvGa2qg