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This article is part of a new series, Planning for the CPP, in which Globe Advisor explores the decisions behind the timing of when to take CPP benefits and reviews different aspects of the beloved and often-debated government-sponsored pension plan.
The standard age for Canadians to take their Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) retirement benefits is 65; at least, that’s what the federal government says. In reality, about one-third of Canadians start taking their CPP benefits when they turn 60, the earliest age possible.
For some, taking the pension sooner is an obvious choice if they need it to pay the bills or have serious health issues that could shorten their life span. But those who can wait would be financially better off in the future. So, why don’t they?
The Globe spoke recently with Lisa Kramer, a finance professor at the University of Toronto who specializes in behavioural economics, about what compels Canadians to take their CPP benefits early:
Why do so many Canadians take their CPP benefits sooner than they should?
It’s such a common phenomenon that it has a name in behavioural science: present bias. It’s the tendency to focus more on the present than the future when making decisions. It can lead us to overvalue immediate rewards and undervalue longer-term ones. Scientific studies show that most people prefer to receive money sooner, even if we know that we could get more if we wait.
We’re focusing on the CPP here, but where else does this come into play in our lives?
Most of us have some degree of impatience, and we see lots of evidence of it in financial contexts. You see it when working people are deciding how much money to set aside for retirement. Many people would rather put as little money away as they can so that they can enjoy their life today, and there are interesting reasons for that. There’s a concept called psychological distance, and one aspect of it is temporal distance. For example, a 20-year-old may find it hard to feel connected to the future version of themselves in retirement in 40 or so years. Even though someone in their 20s might know, conceptually, that if they put away $100 every month it will grow – and make for a much more comfortable retirement than if they didn’t save – they can’t connect very easily with that future version of themselves.
Many people take their CPP benefits early because they’re unsure of how long they’ll live and don’t like the idea of missing out. What’s your take on that?
I think we should consider the opposite. The fact we don’t know how long we’re going to live should encourage us to take the money later, especially given that, in general, people are living longer these days and the cost of living is rising. For many people, it’s less of a problem to die with extra money in the bank than it is to run out of money before you die.
How about the people who wait to take their CPP benefits and/or save early for retirement? Do they just have better self-control?
Some people put systems in place to help. For instance, they set up an automatic withdrawal from their bank account to some kind of retirement savings vehicle so they don’t have to remember to make manual contributions. They automate the process, and then it just happens. That’s a standard way to overcome your worst instincts. This type of system has also been institutionalized in many workplaces with automatic enrolment for retirement savings and automatic increases of contribution rates over time, both of which can be very helpful.
Any final thoughts?
Present bias is really powerful. When it comes to the CPP, once someone turns 60, they’re eligible to receive it, and it’s just very tempting to take the money right away. As a society, we can do more to encourage financial literacy to help people understand the benefits of waiting. Of course, there are cases where it makes sense to take the money early. However, for many people, if they can find a way to make ends meet in the meantime, the benefits of waiting to take the CPP are really compelling. We need to be a little more mindful that every dollar we spend today is many dollars that we won’t have access to in our retirement years.
This interview has been edited and condensed.
If you have any CPP story suggestions or feedback on this series, Planning for the CPP, please leave a comment in the stories or e-mail us at: [email protected]
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