Should I apply for the Canada Pension Plan at age 60 or wait?

5 Feb

Canada’s Canada Pension Plan compared to Australia’s superannuation

The standard age for beginning to receive your CPP retirement pension is the month after your 65th birthday. However, you can take a reduced pension as early as age 60. If you take it before age 65, your pension will be reduced, by up to 36% at age 60. You can also delay receiving CPP and get an increased pension after age 65.

Map of AustraliaWhat should you do? I recently visited Australia and found interesting differences between our two employment-related retirement funding schemes. Consider two cousins: Lisa lives and works in Toronto, Canada while her cousin, Joanna, lives and works in Melbourne, Australia. How do their earnings during their working life serve as a base for retirement income?

Lisa and her employer are each obligated to contribute to the Canada Pension Plan. One half of the contribution is deducted from Lisa’s pay cheque and the employer pays the other 50%. When Lisa turns 60 or at any point after that, she can start to receive a monthly CPP cheque. The amount of the cheque is relative to how much she contributed. Normally it should replace about 25% of her income when working. (At age 65, Lisa can also claim Old Age Security (OAS), which is a set amount that all Canadians receive.)

In Australia, Joanna’s retirement is covered by Australia’s superannuation plan. During her working years the employer contributes the entire 9.5% of salary to Joanna’s plan. This plan is managed privately, not by the government as is the CPP, and there are about 500 superannuation funds in total. (Employees in certain jobs or professions have access only to the superannuation fund(s) available to their sector.) There is no guarantee as to how much the employee will receive in retirement as this depends on how the investments perform in the individual funds. (Australia’s age pension is similar to OAS in that it is funded by general state revenues, so Joanna will receive money from this age 65+.)

The major difference between the two countries is that the CPP is a defined benefit plan and superannuation plans are defined contribution plans. Here, according to how long we work and the salary on which we and our employers contribute, we know how much we will receive in retirement. “Ozzies” don’t know this amount for sure; however, it could be much more than the 25% we receive under CPP.

One of the reasons Canadians take CPP early is that they want to use their contributions up as they cannot be left by will to anyone. In addition, there are very limited survivor benefits to CPP. In other words, Lisa contributed all her working life and if she dies before receiving the benefits or much of them, her spouse may get little or almost nothing. (A spouse who also collects CPP is subject to a cap on survivor benefits if he/she is already receiving maximum CPP him/herself.)

In Australia, the superannuation accrues to Joanna, and (within limits) whatever money she has at the time of her death can be left to anyone she wants. That seems fairer than CPP to me, especially considering that Joanna didn’t even contribute herself. In Canada, we do contribute from our salaries and wages, but we cannot leave our CPP benefits to our partners or children; they get pooled and contribute to the distributions to other CPP recipients.

Self-employed

Again, there are some differences. Here in Canada entrepreneurs must contribute double to the CPP, adding the amount taken from their pay as employees plus the employer’s portion. In Australia, self-employed people are generally not covered by superannuation and aren’t bound by law to make “super” payments for themselves. They can make payments and may get a tax deduction for doing so, much like our RRSP.

As the Australian government doesn’t have an investment board, self-employed Ozzies who want to contribute have to choose the fund in which to invest their savings. Again, that is very similar to Canadians choosing how to invest the funds in our RRSP’s.

Are you approaching the age when you want to consider applying or deferring CPP? Contact me if you would like some advice on what might be best for you A Cash Flow Plan can help to work it out.

For access to the CRA website on CPP click here.