As you approach retirement, your mind may wander back to your financial plan on a regular basis – specifically, whether or not you should defer retirement benefits. It’s true that we’ve covered this issue before, but the stakes involved are sufficiently monumental that the matter deserves re-examination.
The decision – which is costing retirees tens of thousands of dollars in unrealized payments – was recently subjected to forensic analysis by The Globe and Mail. We want to share their findings with you.
Reports The Globe and Mail: “Canadians have been able to delay the start of Canada Pension Plan (CPP) benefits since 1987, and since mid-2013, Old Age Security (OAS) payments as well. Delaying those benefits adds thousands of dollars in annual payments. For middle-income seniors who live well into their 80s, the decision to defer could add up to tens of thousands of extra dollars.”
The Decision Amounts to a Bet
The Globe and Mail analysis is quite technical, so instead of walking you through what amounts to a complex calculation, we’ll cut to the chase. As the story states, the deferral decision comes down to a bet.
That bet is based on how long you expect to live. Die relatively young – in your 70s for example – and you are shortchanged. “The higher deferred payments won’t yet have made up for the lack of benefits for five years,” reports The Globe and Mail. “Live into your 80s or even 90s, however, and the bet pays off handsomely.”
Deploying data from Employment and Social Development Canada (ESDC), The Globe and Mail analysis demonstrates that “just 11 percent of seniors born from 1945 to 1950 opted to defer their CPP benefits, and only 4 per cent delayed the start of payments for the full five years.”
And when it comes to OAS payments, the story is even more skewed. Seniors overwhelmingly opt for the benefit the moment it becomes available – upon turning 65.
Can You Afford the Delay?
The decision against the deferral of benefits is usually based on need. Retirees can’t afford to wait, since “the arrival of CPP and OAS benefits can represent a financial lifeline. Plus, if you expect to die in your 70s, deferral is a financially imprudent choice.”
And there is another factor: your belief in the long-term sustainability of the CPP and OAS programs. According to a recent news report by Reuters: “The federal government’s COVID-19 pandemic support programs have already pushed Canada’s debt-to-GDP ratio to a projected peak of 48.0% in 2021/2022 from 30.9% in 2018/2019. It could decline more slowly from there due to the increased spending.”
In other words, Canada’s massive debt load could impact decisions about just how sustainable CPP and OAS programs are in the long run. According to The Globe and Mail story though:
The CPP is fully solvent, and the federal government’s finances are deemed sustainable even with rising OAS outlays, according to the Parliamentary Budget Officer.
For a lot of aging Canadians, a bird in the hand is worth two in the bush. And can you really blame them for thinking that way?