Optional Additional CPP

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gaspr
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Optional Additional CPP

Post by gaspr »

This is just a thought experiment that I would like some feed back on. Now I know that many or most of the prolific posters on this forum have achieved FI and have few if any money worries, and for that, you have my congratulations. But for those of us with more modest means, this is an idea that I am kicking around...

I see CPP as one of the most useful retirement income sources thatmy wife and I will have. By delaying to age 70, we can safely spend down our savings as a bridge. It is a hedge against all three of the big retirement income risks...inflation risk, longevity risk, and sequence or market risk. All this has been discussed here many times.

So....What if an option was available at say age 65, to purchase a limited amount of additional CPP annuity in exchange for a lump sum. I believe it would not only be possible, but that it could and should be profitable for the CPP Investment Board to provide and administrate this idea. The profits from this are important. It might make the whole idea more politically palatable if profits can be earned and used to fund assistance for the less fortunate among us. Perhaps used to fund the GIS for an example.

This idea seems to me to be a win for all concerned with the notable exception of the life insurance industry. All the necessary systems are pretty much in place with regards to actuarial and administrative needs. The only thing necessary to make this work is the political will. The insurance industry lobby would no doubt scream bloody murder, but it should be noted that this is a product (actual inflation adjusted fixed annuities) that they choose not to offer at the moment.

Anyhow, your thoughts are welcome. Flame away!
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Re: Optional Additional CPP

Post by Ken »

So many things
- I agree that CPP is a very useful source of retirement income. Since most of us no longer have defined benefit pension plans we are, except for CPP and OAS, thrown to the financial wolves (advisors and their ilk) and most of the populace doesn't know how and won't learn how to manage their own retirement savings.
BUT:
- I would never voluntarily give the government more money to mismanage.
- After starting to collect CPP I worked a bit and had to make additional contributions and so I clearly saw the effect of that on my monthly CPP cheque. The amount I was forced to contribute divided by the monthly difference in what I receive comes out to 40 years to make back what I paid in.
- I started taking CPP at age 60 because I figure if the gov't wants to give you money, take it. Take it now.
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Re: Optional Additional CPP

Post by gaspr »

To be fair, the CPPIB is generally thought to be doing a pretty good job of managing things.

Milevsky defines "mortality credits" as contributions that are reallocated from those who die to those who survive. I guess that I see it as an opportunity to benefit from our potential "mortality credits" that will otherwise go unused.
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Re: Optional Additional CPP

Post by ig17 »

gaspr wrote: 10 Jan 2018 19:20 To be fair, the CPPIB is generally thought to be doing a pretty good job of managing things.
Not everyone agrees with that assessment.

CPP board can't escape blame for fund's bloated state

Prior discussion on FWF:

CPPIB strategy change and costs
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Re: Optional Additional CPP

Post by max88 »

CPP is a defined pension, the largest in Canada. Like every pension, it's subject to under funding or over distributing, or both, plus management overhead. For those getting more than their contribution, it's a good deal (or just a fair deal depending on perception). When it runs dry there is nothing we can do about it. It's a greater fool in different form. For this reason I am reluctant to get optional.

I was reading this http://www.financialwisdomforum.org/for ... 0&t=120761, before coming over here. It's saddening. No pension of any size is immune.
I am cautiously optimistic. When it goes up, I claim I have been optimistic; when it goes down, I claim I have been cautious.
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Re: Optional Additional CPP

Post by ghariton »

A DB pension is the most efficient way to shift longevity risk from the individual to some group (other pensioners and shareholders in the case of a private plan, taxpayers in case of a public plan). Yes, longevity risk is only one factor to consider in considering DB pensions, and it can be taken care of in other ways. But for those in accumulation stage, without that much in savings, nor the prospect of a large inheritance, I think that having a large DB pension makes sense. That depends on the cost to the individual, of course. But if the pension is actuarially fair or better, it's a darn good deal.

Government could, in theory, default on its pension obligations. There has been much talk of that in various states and municipalities in the U.S. But those plans are governed by a much different regime than ours. More generally, national public pension plans have a pretty good record around the world. Even when Greece was on the verge of bankruptcy a few years ago, the politicians fought hard to protect public sector pensions, and largely succeeded.

FWIW, I took CPP at 60. But at that time, the penalty for early start was much smaller, and I avoided a string of "zero" years. Plus I bet that I could outperform the CPPIB (by and large I have matched it). I would not recommend this to the average investor today, especially if they are risk averse.

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adrian2
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Re: Optional Additional CPP

Post by adrian2 »

ghariton wrote: 10 Jan 2018 22:30 FWIW, I took CPP at 60. But at that time, the penalty for early start was much smaller, and I avoided a string of "zero" years.
Longinvest has shown that even with a string of "zero" years, it makes a lot of sense to take the CPP at 70.
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Re: Optional Additional CPP

Post by Ken »

adrian2 wrote: 11 Jan 2018 09:14Longinvest has shown that even with a string of "zero" years, it makes a lot of sense to take the CPP at 70.
I disagree. If you take it at age 60 VS 65 then you are ahead of the game until you turn 76. Age 60 VS 70 you are ahead of the game until you turn 80. All the arguments for not taking it right away assume that you're gonna live a long, healthy old age. What if you don't? Also, it just feels good to be collecting a CPP cheque NOW, while I can use it for fun stuff. I won't mind or even think about being "behind the game" after I turn 80.
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Re: Optional Additional CPP

Post by gaspr »

Ken wrote: 11 Jan 2018 10:16
adrian2 wrote: 11 Jan 2018 09:14Longinvest has shown that even with a string of "zero" years, it makes a lot of sense to take the CPP at 70.
I disagree. If you take it at age 60 VS 65 then you are ahead of the game until you turn 76. Age 60 VS 70 you are ahead of the game until you turn 80. All the arguments for not taking it right away assume that you're gonna live a long, healthy old age. What if you don't? Also, it just feels good to be collecting a CPP cheque NOW, while I can use it for fun stuff. I won't mind or even think about being "behind the game" after I turn 80.
You are misunderstanding longevity risk. If you die young, yes it turns you would have been right to take CPP early, BUT you won't care because you will be in fact, dead. If however, you "fail to die in a timely manner", your chances of running out of money goes way up...that is longevity risk.

Anyone have any opinions on the idea in the OP? Crazy? Unworkable? Impossible?
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Re: Optional Additional CPP

Post by ghariton »

adrian2 wrote: 11 Jan 2018 09:14
ghariton wrote: 10 Jan 2018 22:30 FWIW, I took CPP at 60. But at that time, the penalty for early start was much smaller, and I avoided a string of "zero" years.
Longinvest has shown that even with a string of "zero" years, it makes a lot of sense to take the CPP at 70.
Yes.

Of course, I hadn't had the benefit of longinvest's analysis, back in 2006 :wink:

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Re: Optional Additional CPP

Post by Ken »

gaspr wrote: 11 Jan 2018 10:34 You are misunderstanding longevity risk. If you die young, yes it turns you would have been right to take CPP early, BUT you won't care because you will be in fact, dead. If however, you "fail to die in a timely manner", your chances of running out of money goes way up...that is longevity risk.
If we are talking purely about CPP then you will not run out of money. You don’t HAVE any money. You just have an an income which continues till you die. So you must be talking about your total portfolio. In the best case you don’t need the CPP income at all until you are 70 and so you reinvest 10 years worth of income and start eating into it after 70. But really I just LIKE getting a gov’t cheque every month. And my basic policy is to defer tax and take benefits early :)
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Re: Optional Additional CPP

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Ken wrote: 11 Jan 2018 14:12 But really I just LIKE getting a gov’t cheque every month. And my basic policy is to defer tax and take benefits early :)
So what would you do in this more extreme example:

A grandparent immigrates to Canada, sponsored by his family, at age 64.
He can apply for OAS at age 65, and he'll get 1/40 of the maximum OAS.
Or he can wait one more year until age 66, and he'll get double that, 2/40 of the maximum OAS.
Or he can wait until age 70, in order to get 6/40 of the maximum OAS.

If you were in his shoes, would you take the benefit as early as possible?
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Re: Optional Additional CPP

Post by Ken »

adrian2 wrote: 12 Jan 2018 08:36
Ken wrote: 11 Jan 2018 14:12But really I just LIKE getting a gov’t cheque every month. And my basic policy is to defer tax and take benefits early :)
So what would you do in this more extreme example:

A grandparent immigrates to Canada, sponsored by his family, at age 64.
He can apply for OAS at age 65, and he'll get 1/40 of the maximum OAS.
Or he can wait one more year until age 66, and he'll get double that, 2/40 of the maximum OAS.
Or he can wait until age 70, in order to get 6/40 of the maximum OAS.

If you were in his shoes, would you take the benefit as early as possible?
You're right, it's an extreme example. OAS / 40 is about $15. $15 is pretty worthless. I'd definitely wait 1 year to double it. After that it depends how badly he needs $30 a month. The max he's gonna get is 6/40 = approx. $90 which will feed him for a while but no matter when he takes this tiny OAS he's still gonna need some other support. I don't know if he'd qualify for the supplement which makes it more like $800 but 1/40 is still nothing. Anyway, if you look for outliers you'll find them.
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Re: Optional Additional CPP

Post by ockham »

adrian2 wrote: 12 Jan 2018 08:36
Ken wrote: 11 Jan 2018 14:12 But really I just LIKE getting a gov’t cheque every month. And my basic policy is to defer tax and take benefits early :)
So what would you do in this more extreme example:

A grandparent immigrates to Canada, sponsored by his family, at age 64.
He can apply for OAS at age 65, and he'll get 1/40 of the maximum OAS.
Or he can wait one more year until age 66, and he'll get double that, 2/40 of the maximum OAS.
Or he can wait until age 70, in order to get 6/40 of the maximum OAS.

If you were in his shoes, would you take the benefit as early as possible?
OT: Doesn't OAS have a 10 yr minimum residency requirement?? Just asking. (I know that, strictly, this is irrelevant to the point you're making).
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Re: Optional Additional CPP

Post by ockham »

The answer to my own question is that there is a 10 year as-an-adult minimum residency requirement to qualify for OAS.

https://www.canada.ca/en/services/benef ... ility.html
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Re: Optional Additional CPP

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ockham wrote: 12 Jan 2018 10:54 The answer to my own question is that there is a 10 year as-an-adult minimum residency requirement to qualify for OAS.

https://www.canada.ca/en/services/benef ... ility.html
Unless there is a country level agreement which counts the residence in both countries for the purpose of eligibility.
For immigrants coming from those countries, my example stands as is.
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Re: Optional Additional CPP

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Ken wrote: 12 Jan 2018 10:00
adrian2 wrote: 12 Jan 2018 08:36
Ken wrote: 11 Jan 2018 14:12But really I just LIKE getting a gov’t cheque every month. And my basic policy is to defer tax and take benefits early :)
So what would you do in this more extreme example:

A grandparent immigrates to Canada, sponsored by his family, at age 64.
He can apply for OAS at age 65, and he'll get 1/40 of the maximum OAS.
Or he can wait one more year until age 66, and he'll get double that, 2/40 of the maximum OAS.
Or he can wait until age 70, in order to get 6/40 of the maximum OAS.

If you were in his shoes, would you take the benefit as early as possible?
You're right, it's an extreme example. OAS / 40 is about $15. $15 is pretty worthless. I'd definitely wait 1 year to double it. After that it depends how badly he needs $30 a month. The max he's gonna get is 6/40 = approx. $90 which will feed him for a while but no matter when he takes this tiny OAS he's still gonna need some other support. I don't know if he'd qualify for the supplement which makes it more like $800 but 1/40 is still nothing. Anyway, if you look for outliers you'll find them.
The point is not so much the amount, but the fact that one has to evaluate the numbers in order to arrive at a rational decision, as opposed to an ideological one.

Longinvest has done just that, and the conclusion is pretty clear: for the vast majority of people, especially for forum readers, it pays to wait in applying for CPP/OAS, even with a "string of zeroes" added in the CPP formula.
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Re: Optional Additional CPP

Post by Ken »

adrian2 wrote: 12 Jan 2018 13:01for the vast majority of people, especially for forum readers, it pays to wait in applying for CPP/OAS, even with a "string of zeroes" added in the CPP formula.
Fair enough. But my point, or at least part of my point, is that you have to live life. I don't want or care to try to eke out the maximum CPP 10 years in the future, hoping I live that long, hoping the whole system doesn't change and those benefits get dropped or replaced. Assuming a person actually needs that cash, then I would also assume that the person actually needs it NOW. I'll stand by my first position:
  • Age 60 VS 70 you are ahead of the game until you turn 80.
  • It just feels good to be collecting a CPP cheque NOW, while I can use it for fun stuff. I won't mind or even think about being "behind the game" after I turn 80.
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Re: Optional Additional CPP

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Ken wrote: 14 Jan 2018 10:08 Assuming a person actually needs that cash, then I would also assume that the person actually needs it NOW. I'll stand by my first position:
  • Age 60 VS 70 you are ahead of the game until you turn 80.
  • It just feels good to be collecting a CPP cheque NOW, while I can use it for fun stuff. I won't mind or even think about being "behind the game" after I turn 80.
Assuming a person actually needs that cash NOW, I don't have an issue with what you write above. I'll just posit that the majority of forum readers do not need the cash NOW, as they have investments that can provide cash flow for the decade between 60 and 70.

See longinvest's thread for all the math.
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Re: Optional Additional CPP

Post by AltaRed »

With the new discount factors, it pays to take a serious look at deferment. Didn't make nearly as much sense under the prior system...which is what I purposely signed on too when I took CPP at about age 62.5 yrs of age. I basically picked a window that gave me a bit of a cushion for zero years, and when the new regime was to take effect.
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Re: Optional Additional CPP

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AltaRed wrote: 14 Jan 2018 11:49 With the new discount factors, it pays to take a serious look at deferment. Didn't make nearly as much sense under the prior system...which is what I purposely signed on too when I took CPP at about age 62.5 yrs of age. I basically picked a window that gave me a bit of a cushion for zero years, and when the new regime was to take effect.
I wonder if that is really true. I suspect that if the numbers were run using the old deferral premiums, that one would still come out well ahead if you analyzed it in the same way that longinvest did. The magic does not come so much from the deferral premium as it does from freeing you up to be able to safely draw down your nest egg at a much higher rate.
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Re: Optional Additional CPP

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Re: Optional Additional CPP

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gaspr wrote: 14 Jan 2018 12:07
AltaRed wrote: 14 Jan 2018 11:49 With the new discount factors, it pays to take a serious look at deferment. Didn't make nearly as much sense under the prior system...which is what I purposely signed on too when I took CPP at about age 62.5 yrs of age. I basically picked a window that gave me a bit of a cushion for zero years, and when the new regime was to take effect.
I wonder if that is really true. I suspect that if the numbers were run using the old deferral premiums, that one would still come out well ahead if you analyzed it in the same way that longinvest did. The magic does not come so much from the deferral premium as it does from freeing you up to be able to safely draw down your nest egg at a much higher rate.
Here's a post from the other topic:
Chuck wrote: 27 Mar 2017 17:32
longinvest wrote: 26 Mar 2017 11:18 As he had a spotty work record, his $0 earning years already exceeded the 17% drop out provision at age 60.
Hi longinvest, I just wanted to ask a question to get your thoughts since I have seen a few posters say they did not want to defer past age 60 due to fear of adding more zero earning years which they would not be able to drop out.

However, your example seems to indicate, even if you have exceeded the 17% drop out max, it does no real harm to exceed it by 5 more years. Would you say this is because the 7.2%/year (36% over 5 years) actuarial reduction in CPP does much more to reduce your payout than adding 5 more zero earnings years into the calculation? It would also seem that if you are under the 17% dropout limit at age 60, it would be even more beneficial to defer to at least 65 as some of your zero earnings years would not even hurt.

And then, of course, it becomes again more beneficial to add another 5 years to age 70, as those zero earnings years are not even a factor.
I concur with gaspr's assertion that even at the old discount factor the conclusion would not have changed.
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Re: Optional Additional CPP

Post by AltaRed »

I actually said 'doesn't make as much sense' albeit it would still be better and thus I don't disagree. The difference was marginal to me as my RRSP is/was less than 10% of my investable assets and my CPP is split 50/50 anyway with my ex.
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