Will taking CPP affect GIS?

Recently a client asked for my help deciding when to take his Canada Pension Plan (CPP) retirement pension, and I found the calculations to be so interesting that I just had to share them.

Peter’s history

Peter is currently age 55, and he had retired from working at the end of 2013. He had been self-employed for most of his life, and while he had some pensionable earnings most years, he had only a few years at the Year’s Maximum Pensionable Earnings (YMPE) level ($52,500 for 2014).

Peter’s assumptions

Peter had recently received his CPP Statement of Contributions (SOC), which showed that he would receive $320 monthly if he were age 60 today or $500 monthly if he were age 65 today.

Using these SOC estimates, he had calculated his “breakeven period” as 8.9 years, meaning that he would be further ahead by waiting until age 65 to start his CPP, as long as he lived to at least age 73.9.

Related article: The math on taking CPP early

The reality of the SOC estimates

The SOC estimates are calculated as though you’re eligible for a retirement pension on the date that the SOC is printed. That is, the estimates assume your future earnings will be the same as your current lifetime average earnings, projected through until age 60 or 65.

Related article: Understanding CPP Statement of Contributions (SOC) 

Since Peter wasn’t planning to have any earnings after 2013, these results really didn’t apply to him.

When I did the actual CPP calculations for Peter, his real choices (in 2014 dollars) were a retirement pension of $280 at age 60 or a pension of $395 at age 65. This was a far cry from what Peter had expected based on his SOC.

This reality changed his breakeven period to 12.0 years, meaning that he would have to live until at least age 77 before he would be better off waiting until age 65 to start receiving his CPP retirement pension.

How the Guaranteed Income Supplement (GIS) comes into play

Peter doesn’t have a private pension or many RRSP savings, and he expects to be eligible for the Guaranteed Income Supplement (GIS) after he turns age 65.

Related article: Understanding GIS

The amount of GIS that Peter will be eligible for depends on the amount of other income that he has, including his CPP. For the most part, the GIS is reduced by 50 cents for every dollar of other income that a person has.

This means that if Peter waits until age 65 to receive his $395 CPP amount instead of taking $280 at age 60, his GIS at age 65 will be reduced by about $57.50 monthly. (This is half of the amount that he gains by waiting.) And it will double his breakeven period to approximately 24 years, which means that he must live until age 89 to be better off by waiting until age 65 to start his CPP, rather than starting it at age 60.

Conclusion

I don’t recommend that everyone should try to maximize their GIS eligibility, because it really is intended just for low-income seniors and maximizing it is not something to strive for.

I do recommend, though, that if you think you will be eligible for the GIS, don’t ignore how it is affected by your other income sources and how it should therefore affect your other retirement income decisions.

Written by Doug Runchey

Doug Runchey worked for the Income Security Programs branch of Human Resources and Skills Development Canada for more than 32 years, and was a specialist in the Canada Pension Plan and Old Age Security legislation, regulations and policy areas. He now runs his own company, DR Pensions Consulting, which provides pension advice, including detailed calculations for CPP retirement planning and “credit splitting” purposes. Doug can be reached by email @ DRpensions@shaw.ca or check out his website at http://www.drpensions.ca/.

10 Responses to Will taking CPP affect GIS?

  1. One astute reader has pointed out that Peter won’t be eligible for GIS at age 65, due to the upcoming change in age-eligibility for OAS. This is absolutely true, and while it doesn’t change the overall principle that GIS eligibility should be considered when deciding when to start your CPP, it would reduce Peter’s breakeven calculation by a year or two.

  2. When I was making my 2 decisions whether to start collecting CPP at 60, 61,62, 63, 64, or 65, as well as whether to collect OAP at 65 up to 70, I did the calculations too. I am not concerned with the GIS as I have other income.

    My parents are living into their 90’s, so I expect to have a longer than normal life; my health is excellent.

    My conclusion, after looking at the numbers, and all, is to take the money now and happily spend it – with gratitude that I live in Canada!

  3. I still say that deciding on early or late CPP is a complete no-brainer. The one critical variable that could affect the calculation is how long you will live. Since no one can know for sure how long they will live, you’re nuts not to take it as soon as possible. Unless of course, you’re OK with your heirs getting only $2,500 (taxable) even though you’ve contributed tens, if not hundreds of thousands of dollars to the plan. If you’re 60 and have debt you MUST take it and payoff debt with it. Pre-tax, after tax, still working, not working – I don’t care.

    • Don

      I don’t agree with you that it’s a no-brainer, but I will concede that you’re entitled to your opinion.

      Just in case you’re interested, if you contributed the maximum CPP amount every year from 1966 to 2014 as an employee, you would have contributed a total of $43,111.05. If you were self-employed, you would have contributed double that amount. Nobody has contributed hundreds of thousands of dollars yet.

      • It just feels like hundreds of thousands I guess. BTW, like millions of other CPP contributors, I am self employed and have been for many years so I’m close to your maximum of $86,222. And as you suggest, that’s how much I’ve contributed so far. So how much longer will I have to contribute to reach the $100K (or one “hundreds of thousands of dollars”)?
        On the question of it being a no brainer, what criteria do you suggest the decision hinges upon for the average person? Do you suggest we roll the dice on what we believe our life expectancy will be?

  4. “Yet” being the operative word. Like millions of other CPP contributors, I’m self employed and still working and contributing. How long will it be until we have contributed ONE “hundreds of thousands of dollars” to the plan?
    And what exactly is the criteria that the average person should use to decide about taking benefits early? The only arguement I’ve ever seen requires a rolling of the dice on life expectancy. Do you have other suggestions?

    • Don

      If you have already contributed the maximum every year since 1966, that would make you at least 66 years old now. I’d recommend that you take your CPP immediately and stop contributing before you ever reach that milestone.

      If you’re exaggerating a bit though, and you didn’t start contributing in 1966, I’d need to know when you were born and when you first starting contributing at the maximum rate as a self-employed person.

      And that brings me to the answer to your second question also. In my mind, the decision should be made on accurate numbers, tailored for each individual.

      Maybe I wouldn’t recommend rolling the dice on life expectancy if the breakeven age for me was 85ish, but maybe I would if it was 75ish.

      It’s one thing to be concerned about leaving money on the table if you die young, but some people are equally concerned about outliving their money. For them, the more that they can increase their fully-indexed CPP and OAS pensions, the better.

      I don’t think there’s a one-size-fits-all answer for everyone.

  5. I respectfully disagree. Unless you’re a very selfless individual and believe that leaving money on the table for the enjoyment of your fellow CPP contributor is OK or may give you the extra Karma points you need to get into heaven, how long you live to collect benefits is the only factor that matters. You can’t solve a calculation without it and it’s just too unknown an assumption to really rely on.
    Also, the age 73 breakeven point only looks at the difference in the dollars received. To properly frame the question you need to apply even a small amount of growth to that early benefit. Even a modest 2% pushes the breakeven to 76, 5% to 79. And if the benefits are used to pay down credit card debt of 12% there’s just no contest. Anyway, that’s my 2 cents. Consider me firmly in the camp that except in a very unusual circumstance (that I can’t think of but you’ve probably encountered), taking CPP early is the way to go.

    • Don

      That sounds like a fine place to leave it!

      I’m not coming out in favour of taking it early or late. I’m just suggesting that you should have accurate numbers as your starting point, and consider as many relevant factors as you can.

      I agree that life expectancy is the greatest single factor in the breakeven equation, and while I agree that it is uncertain I don’t agree that means you ignore it.

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