If there is any good news that can come with high inflation rates, it may be the resulting cost-of-living adjustment. Each year, certain personal income tax and benefit amounts are indexed to inflation using consumer price index (CPI) data. With inflation reaching 40-year highs in recent times, the adjustment is one of the largest in many years.
Many adjustments will take effect on January 1. For instance, the TFSA annual dollar limit will increase from $6,000 to $6,500 for the 2023 year. Other adjustments take place on July 1, such as income-tested benefits like the goods and services/harmonized sales tax credit and the child disability benefit, as this date coincides with the beginning of the program year for these benefits.
The Impact of Inflation on CPP Benefits
Canada Pension Plan (CPP) benefits are influenced by inflation in two ways. First, they are indexed to CPI using a measure over the 12-month period ending October of the previous year. Second, CPP is also adjusted based on the year’s maximum pensionable earnings (YMPE), an amount indexed to wage inflation. Over recent times, increases to the YMPE have been significant: 4.94 percent in 2021 and 5.36 percent in 2022. This was largely due to the pandemic, when the services industry suffered and fewer people worked in lower-paying jobs, pushing up average weekly earnings.¹ Increases in inflation may have a particularly significant impact on CPP benefits the longer you wait to start.
The Timing Decision Can Further Enhance CPP Benefits…
As a reminder, the standard age to start CPP is 65, but you are able to begin as early as age 60. Most people choose to start early,² and if you start receiving CPP benefits before age 65, payments will decrease by 0.6 percent each month to a maximum of 36 percent (if you start at age 60). However, if you start after 65, payments increase by 0.7 percent each month, to a maximum of 42 percent (if you start at age 70 or after). This increased payment percentage from starting CPP later further amplifies future increases to the CPI and YMPE.
…And the Difference Can Be Significant
A recent analysis shows just how significant the impact can be by waiting.³ It looks at an individual who started CPP at age 60 in January 2020, with a decreased benefit of 36 percent (0.6% X 60 months). Assuming the maximum CPP pension amount of $1,175.83 in 2020, she received $752.53. Had she waited a year and started at age 61, she would have received $857.07 (a 28.8 percent decreased benefit from $1,203.75). If she waited until age 62, she would have received $982.81, or 30.6 percent more than if she started at age 60.
The table shows the potential increase over time, based on actual 2021 and 2022 figures. It assumes future CPI adjustments (after 2022) of 2 percent and maximum retirement pension increases of 3 percent based on existing actuarial assumptions.
By these calculations, at age 90 an individual would have a cumulative pension that is 83 percent larger by waiting to start at age 70, compared to starting early at age 60.
Of course, many factors should be considered when deciding when to begin CPP, including expected longevity, the impact of income-tested benefits, the need for income and more. However, the impact of inflation may be one compelling reason for individuals to consider waiting to begin CPP benefits.