CPP and OAS

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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Pickles
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Re: CPP and OAS

Post by Pickles »

brucecohen wrote:
Pickles wrote:Under the old rules, she had to pay CPP premiums on her income but could not draw from her CPP early without retiring.
Not really true. Under a literal reading of the Act, you had to be "wholly and substantially" retired for two months* and were then free to return to work. ...In reality, though, neither the Act nor the regulations cited any penalty for violating the two-month requirement so CPP officials never bothered to try enforcing it.
The nature of her work was such that she did not want to refuse any for 2 months because she feared it would result in losing clients. Maybe they don't enforce it but they do ask you to affirm that you will not be working for those two months. That's enough for most law-abiding citizens. :D
... the new rules hurt the self-employed like me who pay both sides of the contribution. I started CPP at 60 because I otherwise would have to pay more for the additional pension than it was worth.
. Ironically, she considers this an advantage.
Alas, now I again have to pay 9.9% on my earnings, though I'm lucky in that I'm now substantially retired and not earning all that much.
Are you sure, Bruce? I thought the new rules don't affect anyone who was drawing CPP in Dec 2010.
edited: CPP increases the early pension annually to reflect additional contributions and doesn't wait until retirement.
I think I read that it will take CPP 1 or 2 years to adjust the pension. It'll be interesting to see how they do.
The undertaking is to pay it during the year following the year the extra premiums were paid. :roll:
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Re: CPP and OAS

Post by brucecohen »

Pickles wrote:. Ironically, she considers this an advantage.
Has she calculated the present value of the additional pension and compared that to her cost as a self-employed person?
Are you sure, Bruce? I thought the new rules don't affect anyone who was drawing CPP in Dec 2010.
This says the contribution requirement will apply to those already receiving CPP if they're under 65.
The changes do not affect the benefits of anyone who is currently collecting the CPP retirement benefits, unless they will not reach the age of 65 before 2012, and are still earning pensionable earnings. Those collecting their pension prior to 2012 will have to start contributing again in 2012 if they are earning pensionable earnings, and have not yet reached 65 years of age.
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Re: CPP and OAS

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steves wrote:BTW..... My example was for someone absolutely retired at age 60. I haven't included salary in either projection.
It was fascinating to pour over your detailed calculations, Steves. Thank you so much for posting them. They really help me to see the compounding effect of the difference in CPP income between the two examples over 2 decades. It may not be too fair to gloat over "geniuses" making mistakes having taken early CPP, though. Much of the advantage you show is due to the new rules which don't affect those of us who have already started our claims. That said, your charts really show that the advantage of CPP at 60 is rapidly eroding as the new rules are phased in.

I also have some questions about your results.

My first is about contributory periods. Your guy has a 10 year longer contributory period in example 2 than in example 1. For all 10 of those years he has zero pensionable earnings. What difference should that make to his pension entitlement, before adding the 42% bonus for waiting until 70 to draw his pension? Did you, perhaps omit that in your calculation for the "retirement at 70" scenario?

My second question is how did you get the starting CPP for each example? Using the current CPP maximum pension, adding 2% each year for inflation, applying the penalties/bonuses for starting early or late and discounting example 2's starting pension because of a greater drop out would seem to be the right way to calculate the pension in each scenario but I get significantly different figures from you when I do this.

You assume the guy in both examples has earned the maximum insurable earnings each year between ages 18 and 59. So, in the first scenario, he will have no reduction of pension for low premium contributions during his contributory period of 42 years (60-18). He will, of course have a hefty penalty for taking his pension 5 years early. He'll get 100% of a 2013 pension when he retires minus the 32.4% penalty. The CPP maximum payment in 2013 should be the 2011 payment ($11,520) plus two 2% increases for inflation: $11,985. Subtract 32.4% and he should receive a starting pension of $8,102 in 2013, by my calculations. You've got his starting pension to be $7,520. From my explanation of my calculations, can you figure out why we are so far apart?

In your second example his contributory period is 52 years (until he's 70 and starts CPP). However he has earned no money in the last 11 years of his contributory period. That will reduce the maximum pension he can receive. Under the new rules he's entitled to "drop out" 17% of any low/no pensionable earning years in his 52 year contributory period. That reduces the years he must have worked from 52 to 43. However, he has worked only 41 years. His pension will be reduced to 95% of the maximum (41 years credit/43 years required). On the plus side, the reduced amount is then increased by 36% because he delayed taking his pension until age 70.

With 2% annual inflation, the maximum CPP pension has risen from $11,985 to $14,610 between 2013 and 2023. He gets 95% of that -- $13,879 -- plus 3642%: $18,878,$19,798 by my calculation. This is significantly lower than the $20,340 listed on your chart. Can you see where you and I did things differently?

I'm trying to learn more about how CPP works so humbly appreciate any response. And,if it's my faulty math, I apologize in advance.

edited once to correct bonus for taking pension late
Last edited by Pickles on 15 Nov 2011 11:17, edited 1 time in total.
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Re: CPP and OAS

Post by steves »

One area I have not concentrated on accuracy-wise is CPP based on salary history. The program allows you to enter any value you choose for CPP, assuming the subject has gotten his CPP entitlement (brownie points) from the feds, who have access to his salary history. The amount of base CPP thus entered is then adjusted (+/-) for the new 60-65-70 offset rule as well as inflation.

I have concentrated more on tax accuracy.... deductions, credits, clawbacks... for fed tax as well as each province, including the indexing of the marginal (fed&prov) thresholds.

You can pull down the program and play with the various CPP parameters to see the effect. I don't think you will want me to bore you by listing the source code for the CPP routine, however.
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Pickles
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Re: CPP and OAS

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Thanks for responding, Steves. You've confirmed what I figured. I imagine using actual CPP numbers and reducing the pension to reflect the years of non-contribution would change your results sufficiently to make the "break even" point pretty much correspond with the expected mortality age of 82. I don't know how to change the figures to play with your chart, though.

I think a person having that choice today (Bylo, for example) is better off taking the CPP early as I have done. We may not be "geniuses" but we recognize there is still an advantage to doing so. Once the new rules are fully phased in, that advantage may disappear except where the person has more years of no/low pensionable earnings than the drop out provisions cover. The example below shows how failure to consider the impact of a longer contributory period can result in lower net gain for a pensioner who delays taking his CPP:

Had Steves guy taken his pension at 67 instead of 70, he would have only received a 33.6% bonus, but it would have been on 100% of the maximum, not 95%. He would have received $56,290 in CPP payments between the ages of 67-70. His inflation-adjusted pension at age 70, would then have risen to $19,518, only $480 less than if he had delayed CPP to 70 to capture the full 42% bonus (on 95% of the maximum CPP in 2023). I don't know how to calculate how long it would take before his higher pension starting at 70 would "earn back" the forgone income of $56,290, but I'm sure it would take more than 20 years at a 2% annual inflation rate.
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Re: CPP and OAS

Post by steves »

BTW, I, along with all the other geniuses, opted for CPP at 60. Go figure.
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Re: CPP and OAS

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steves wrote:BTW, I, along with all the other geniuses, opted for CPP at 60. Go figure.
Good instincts! :lol:
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Re: CPP and OAS

Post by Stan_W »

I have looked through the threads that involve CPP and I have seen a number of calculations of the breakeven age for taking CPP at 60 vs 65 or later. All of these calculations are on the gross amount of the CPP.

My situation is that my MTR is 43% and I expect it to be much less when I retire. ISTM that the breakeven age would be much younger considering that I would only be keeping 57% or less of the CPP for the years between 60 and 65.
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Re: CPP and OAS

Post by AltaRed »

Stan_W wrote:My situation is that my MTR is 43% and I expect it to be much less when I retire. ISTM that the breakeven age would be much younger considering that I would only be keeping 57% or less of the CPP for the years between 60 and 65.
If you are still working and in a high tax bracket, it makes no sense to take CPP now. It is different for those that have retired by age 60 or their income is substantially reduced.
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Re: CPP and OAS

Post by steves »

AltaRed wrote:
Stan_W wrote:My situation is that my MTR is 43% and I expect it to be much less when I retire. ISTM that the breakeven age would be much younger considering that I would only be keeping 57% or less of the CPP for the years between 60 and 65.
If you are still working and in a high tax bracket, it makes no sense to take CPP now. It is different for those that have retired by age 60 or their income is substantially reduced.
If you are in 43% MTR-land, then the timing of your CPP gets lost in the noise.
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Re: CPP and OAS

Post by Stan_W »

Thanks for the replies. This question has been bothering me for a long time since none of the "breakeven age" comparisons took taxation into account.
If you are in 43% MTR-land, then the timing of your CPP gets lost in the noise.
Unfortunately, the higher income has only been for the last few years and there are only a few years left until I turn 65. Before that, a divorce and then a job loss and left me starting over with more liabilities than assets and a very low income. I expect a decent but modest income in retirement, so even a few extra thousand dollars will make a difference.
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Re: CPP and OAS

Post by steves »

Here is that same 59 yearold retiree. This time I gave him $3Million in his RRSP. It appears that the crossover is at age 80-ish.

Mr $3Million CPP at 60 vs 70

Rate 4%, inflation 2%, taxation BC.
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Re: CPP and OAS

Post by adrian2 »

Anyone knowing an algorithm / program / rule of thumb on when to apply for OAS under the following assumptions:
- over 65 years of age
- recent immigrant to Canada (say, Canadian residence 1...20 years)
- worked in a country which has a tax treaty with Canada that allows application to OAS after less than 10 years Canadian residence
- OAS is calculated as (number of years of Canadian residence) / 40, never recalculated after application, just normal indexation.

ISTM obvious that one should not apply after a year of residence - the immediate alternative is to wait another year and collect twice as much for the rest of life (which is one year shorter than the first scenario).

Depending on age / life expectancy, there should be an optimal point to apply. Any guesses?
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Re: CPP and OAS

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adrian2 wrote:Anyone knowing an algorithm / program / rule of thumb on when to apply for OAS under the following assumptions:
- over 65 years of age
- recent immigrant to Canada (say, Canadian residence 1...20 years)
- worked in a country which has a tax treaty with Canada that allows application to OAS after less than 10 years Canadian residence
- OAS is calculated as (number of years of Canadian residence) / 40, never recalculated after application, just normal indexation.

ISTM obvious that one should not apply after a year of residence - the immediate alternative is to wait another year and collect twice as much for the rest of life (which is one year shorter than the first scenario).

Depending on age / life expectancy, there should be an optimal point to apply. Any guesses?
Although I do not consider myself knowledgeable in this area, I think one needs minimum of 10 years stay in Canada to be eligible to receive OAS. So, 25% of full OAS is the minimum payment. Further, if one applies after 10 years of stay at age 65, he/she is entitled to 11/40 th portion of the OAS full payment at age 66, 12/40th at age 67 and so on. So, if one is eligible for OAS, then he/she should apply for it immediately.
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Re: CPP and OAS

Post by adrian2 »

bbsj wrote:Although I do not consider myself knowledgeable in this area, I think one needs minimum of 10 years stay in Canada to be eligible to receive OAS. So, 25% of full OAS is the minimum payment. .
Unless there is a tax treaty, in which case the minimum is 1/40.
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Re: CPP and OAS

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adrian2 wrote:
bbsj wrote:Although I do not consider myself knowledgeable in this area, I think one needs minimum of 10 years stay in Canada to be eligible to receive OAS. So, 25% of full OAS is the minimum payment. .
Unless there is a tax treaty, in which case the minimum is 1/40.
If the minimum is 1/40 then the year after that one will get 2/40, then 3/40 and so on. I think the residency is cumulative even after one starts receiving payment. So, it is better to apply at 65.
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Re: CPP and OAS

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bbsj wrote:If the minimum is 1/40 then the year after that one will get 2/40, then 3/40 and so on. I think the residency is cumulative even after one starts receiving payment.
That is definitely incorrect. Once you apply, if later you have another year of residence, your pension is not recalculated. Please re-read my earlier post.
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Re: CPP and OAS

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adrian2 wrote:
bbsj wrote:If the minimum is 1/40 then the year after that one will get 2/40, then 3/40 and so on. I think the residency is cumulative even after one starts receiving payment.
That is definitely incorrect. Once you apply, if later you have another year of residence, your pension is not recalculated. Please re-read my earlier post.
Yes, I just found out from the website. It is strange not to count the years of residency after start of pension. So, one needs to estimate life expectancy accurately to maximize OAS payments.
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Re: CPP and OAS

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bbsj wrote:So, one needs to estimate life expectancy accurately to maximize OAS payments.
Back to my post, any guesstimate? My mother will soon be 74, good health, soon to be eight years residency. Slam dunk to apply and freeze it at 8/40, or wait?
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Re: CPP and OAS

Post by Nortel'd »

I did not start my CPP this January as I had planned to. For the past three weeks I have spent a considerable amount of time using Excel to calculate and recalculate “my CPP situations” break-even year. I now think I have it all figured out.

As of January 2012, I continue to work and after being in the workforce for 42.67 years, I have more than enough available drop-out years to eliminate the 3 low income years for child rearing and the 6 additional low income years for getting an education and working part time. (By the end of 2012 I will have 35 years of maximum pensionable earnings.)

It seems that whether I start collecting CPP now or wait to begin my CPP in December 2013 (just before I retire in mid-January 2014) the breakeven results are very similar.

In doing my calculations, for 2012 and 2013, I used a 20.37% Average Tax Rate for my Net Income which included my CPP benefit along with income from investments and employment. Starting in 2014, I used a 17.77% Average Tax Rate for my Net Income which included my CPP benefit, my work pension, and income from investments.

Case 1: If I start collecting CPP now at age 60.75, continue to work, pay the CPP premium until I retire in mid-January, 2014, and continue to invest what would be considered “the after taxed CPP” right up until I turn 65 for a yearly return of 2%, I need to live to 80.37 years to break-even .

Case 2: If I start collecting CPP December 31, 2013 at age 62.67, retire in mid-January, 2014, and continue to invest what would be considered “the after taxed CPP” right up until I turn 65 for a yearly return of 2%, I need to live to be 80.35 years to break-even.

I also used 0.00001% (SPEND SPEND) and a 6% (wishful thinking) rate of return.

Case 3: If I start collecting CPP now at age 60.75, continue to work and pay the CPP premium until I retire in mid-January, 2014, and SPEND what would be considered “the after taxed CPP” right up until I turn 65, I need to live to be 76.98 years to break-even .

Case 4: If I could get a yearly return of 6% then my break-even age under Case 1 is 100.23 and under Case 2 is 97.96.

Hummmmm :idea: Dad lived to be 79 and Mom 86.
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I thought by law, CPP has to be actuarially sound?

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I have a question about the recent changes that Harper made to the CPP (increased 'penalty' for starting prior to 65, and increased 'reward' for waiting till after 65). I thought the CPP was already “fully funded & actuarially sound" prior to these changes, as required by law?
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Re: CPP and OAS

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Actuarially sound yes, especially for a 65 year old. However they determined that the actuarial adjustments for those starting their pensions younger or older than 65 were out of date, and were unfair.
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Re: I thought by law, CPP has to be actuarially sound?

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Benchwarmer wrote:I have a question about the recent changes that Harper made to the CPP (increased 'penalty' for starting prior to 65, and increased 'reward' for waiting till after 65). I thought the CPP was already “fully funded & actuarially sound" prior to these changes, as required by law?
What has your first sentence (the question) have to do with the last one (the thought)?
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Re: CPP and OAS

Post by Norbert Schlenker »

Anyone interested in the origin of the early and late retirement adjustments to CPP payouts might want to read this. That should prove definitively that it's all Harper's fault, as Benchwarmer implies, since he was PM when the Chief Actuary filed the report with Parliament in March 2003. Or maybe not ...
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Re: CPP and OAS

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Norbert Schlenker wrote:Anyone interested in the origin of the early and late retirement adjustments to CPP payouts might want to read this. That should prove definitively that it's all Harper's fault, as Benchwarmer implies, since he was PM when the Chief Actuary filed the report with Parliament in March 2003. Or maybe not ...
In addition to the Chief Actuary's study, Harper does not control CPP. CPP is jointly sponsored by Ottawa and the provinces except Quebec. Changes require consent from x number of provinces representing y% of the population. I forget the figures but the requirement is tougher than that needed for constitutional change.

Note: the recent increase in the early retirement adjustment was still less than the fair amount calculated by the Chief Actuary.
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