Took CPP at 65 instead of the previously planned age 70: What changed?

In a nutshell: The combination CPPIB investment strategy changes from passive to active, potentially higher effective future taxes, less transparency in CPP asset valuation due to growing proportion of private (company and real estate) vs. public investments, uncertainty of actuarial forecasts and, should circumstances demand it, government’s ability to change CPP (target) benefits, drove my decision to take CPP at 65, rather than 70. Too many unknown factors all potentially exposing one to downside risk, with very limited upside possibilities. And, those who doubt that government pension benefits can be reduced should reflect upon the recently announced OAS changes or discuss this possibility with the citizens of Greece!

The details

For healthy individuals, I’ve been arguing for delaying the start of CPP as long as feasible financially since this is one of the only available inflation indexed longevity insurance options available for Canadians. Last night, I was having beer and pizza with ex-Nortel friends, and one of them asked if I am still advocating delaying CPP as late as possible, and I realized that I didn’t update my blog readers about my change of heart on the subject and that I received this month my first CPP deposit.

So you might reasonably ask, why did I decide to take CPP at 65? The decision was based on series of individual qualitative and quantitative considerations, none of which by itself sufficient to drive the decision, but altogether they pushed me over the top.

In May we heard in “CPP Fund reports 6.6% return, record assets despite volatile markets” that “CPPIB’s assets are projected to reach $275-billion by 2020, and almost $500-billion two decades later”, “fiscal 2012 performance of the fund benefitted from our active management programs and private market holdings, which are less sensitive to the excessive volatility experienced by the public equity markets”, “CPPIB participated in 60 private transactions during the year, which included deals in private equity, infrastructure, real estate and private debt”, “The CPP fund’s 10-year annualized nominal rate of return, at 6.2%, is above the 4% prospective real rate of return that the Chief Actuary has incorporated in his latest report confirming the sustainability of the CPP” and  “it will be nine years before a portion of the fund’s investment income will be needed to help pay pensions”. As a confirmation of the growing private vs.public investment strategy, this week the Globe and Mail’s “CPPIB in deal for U.S. cable company” reported that the CPPIB was doing another private buyout with partners of a US cable company for $6.6B from a consortium led by Goldman Sachs.

So let me count the considerations that, cumulatively drove me to this personal decision (may not apply to your circumstances or risk assessment):

-CPP size is getting to be quite large and Canadians have a lot of eggs in this one basket ($275B in 2020, $500B in2040)

-CPPIB switched from passive to active investing (which has higher investment management costs and an unkind history of being unable to sustainably even cover additional trading and management fees). By the way, CPP all-in-costs of over 1%, are not low, considering that one can run one’s own passive portfolio comfortably for about 0.3% (see Is the CPP low cost? No it’s not, but its existence can enable ultra-low-cost expanded-CPP or PRPP)

-over that past years CPPIB appears to have switched from essentially public to a growing percentage of private investments (which are not only less liquid, but more importantly, have lower transparency and more discretion in valuing assets compared to investments traded in public markets)

-the CPPIB assumes a 4% real return (after all-in-costs, I assume) on investment in support of its argument that it is fully capable of meeting future obligations (but 4% real return after over 1% all-in-costs is not a cakewalk for a large and growing fund given current low return environment for fixed income and equity investments)

-CPP is really a target benefit rather than a defined benefit plan: it is not pre-funded plan but pay-as-you-go plan where benefits are paid from a combination of in-year CPP contributions and accumulated plan assets (current forecast is that CPP payouts will exceed new contributions in 2021, and once that happens, in case of a market swoon, the pressure to reduce benefits to reflect lower asset base might become irresistible)

-as a target benefit plan, the government has the right to change (increase) CPP contribution rates (already done so in the past when it increased contribution rate from just over 6% to 9.9%) and/or change (reduce) benefits at any time, much the same way as it has recently done so for OAS by delaying start from age 65 to 67 (Note: I am not arguing that, in order to preserve some semblance of cross-generational equity, it is inappropriate to increase pension eligibility age with increasing longevity)

-actuaries won’t take it as a sign of disrespect if I indicate some skepticism about actuarial assumption/forecasts/assurances given that I am a Nortel pensioner who suffered the consequences ‘unexpected’ appearance of a 41% hole in the funded status of my pension. Furthermore, there was the ‘unexpected’ discovery that the demographics driven OAS costs are rising dramatically (you’d think the Boomer demographics would have been known for a few years). Then hearing that the CPPIB actuary assumes 4% real return after expenses in excess of 1% and that CPP contributions will exceed benefits until 2021, while the government is trying to encourage Canadians to delay start of CPP with a combination of incentives/disincentives for later/earlier than 65 CPP start, makes me even more uneasy. So put me down as cautious and skeptical on any actuarial declarations.

-Canadian taxes, while not low compared to many other jurisdictions, are lower now than in the 90s, so there is no guarantee that future taxes will not return to or exceed previous highs by changes to tax rates, brackets, and/or (OAS or other) claw-backs. For example, despite the announced delay in OAS start age, there has been no corresponding announcement on delaying required RRSP-to-RRIF conversion age or reducing required compulsory minimum RRIF withdrawals; yet there has been discussion about potential reduction income level where OAS claw-backs kick in.

All in all, there are far too many unknown factors all potentially exposing one to downside risk, with very limited upside possibilities. The combination CPPIB investment strategy changes from passive to active, potentially higher effective future taxes, less transparency in CPP asset valuation due to growing proportion of private (corporate and real estate) rather than public investments, the inherent uncertainty of actuarial forecasts and government’s ability to change CPP (target) benefits should circumstances demand it, all drove my decision to take CPP at 65, rather than 70. Those who doubt that government pension benefits can be reduced should consider the recently announced OAS changes or discuss it with the citizens of Greece!

P.S. (Added August 9, 2012): Another reason was the non-transferability of enhanced benefit, resulting from delayed start of CPP beyond age 65,to surving spouse.



  1. QUITE RIGHT : The expectation of no further programme changes is foolish. Tax rates and benefit rates are dictated all too often by the need to get re-elected or party ideology rather than the situational realities. Government policy is much like a restaurant — it is only as good as the next time you eat there.

  2. randy deminick · · Reply

    take it at 60 like i did. one cannot predict the future in health or finances

  3. Andrew · · Reply

    Thoughtful analysis. For my part I am particularly concerned about the increasing proportion of private investments, which are by their nature almost completely opaque both as to market value and liquidity, not to mention income to CPPIB. One underlying problem for CPPIB is that as the funds under management grow, available public market investment opportunities become harder to find without the market becoming distorted by the large transaction volumes created by CPPIB’s investment activities. How to solve this conundrum, I don’t know; but it might give me more confidence if a truly independent assessment of the private investments were published regularly, providing data such as anticipated cash flow to CPPIB, potential liquidity under stress, and current conformance to the expected performance when going into each investment.

  4. A.G. Zimmerman · · Reply

    Quite true. The good rate of return on investments would seem to be a result of assuming greater risk, such as ownership of real estate built out over the harbour in Australia. But how many Canadians know any of the details?

  5. I plan to take it at 60. (I retired at 50)
    Two reasons..
    1. Uncertainty in Govt. policy as stated here.
    2. Uncertainty in longevity… may never make back the money
    you gave up by waiting if you happen to die too soon.

    My policy in retirement is take all you can as soon as you can.

  6. “yet there has been discussion about potential reduction income level where OAS claw-backs kick in.” I’ve been advocating this for years. You say it’s being discussed? Where?

  7. I don’t recall specific sources, but I just did a web search on the subject and I quickly located a few mentions of the suject. Examples from papers and the blogosphere can be found at:
    Where Rob Carrick writes “The government could either increase the percentage amount of OAS benefits that are clawed back by a modest amount, or it could apply the current clawback rate at a somewhat lower income level. Another option is to de-index the annual income level at which the clawback applies.”
    Where Doug Nelson writes “If the government were truly serious about managing future costs of this program, it could have been more aggressive by reducing the income level at which the Old Age Security clawback begins. In 2012, Old Age Security begins to be clawed back at $69,562 per spouse. This means that a retired couple could have a combined income of close to $140,000 before they could be considered as having a financially unsecure retirement and thus begin to lose some OAS benefits. Really? That seems a little high, especially when you speak about financial security in old age. ”

    And Mr. Flaherty was quoted in
    …as having said “One can have a debate about when the clawback should start to happen and how much it ought to be. Those are judgment calls,” finance minister Flaherty told reporters Friday following a speech to business leaders.”

    And by the way we do have precedents of OAS (and CPP) changes…OAS clawback introduced in late 80s, recently announced start age moved from 65 to 67…and the changes are rarely favorable to retirees, so I wouldn’t preclude future changes either. However I am not predicting any specific future changes, as my crystal ball is very cloudy as usual. My point in the blog was to indicate that there were many factors (downside risks) which all together pushed me to make my personal decision. Only, time will tell if I made the right call.

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