The biggest obstacle to delaying CPP payments, among those who can afford it, is loss aversion. This psychological phenomenon occurs when retirees feel it’s unfair to miss out on CPP income they could have claimed if they died earlier than their breakeven point.
Implementing a CPP “money-back guarantee” as a death benefit could improve decision making, the National Institute of Aging proposed in a report last month.
In retirement, people are most scared of running out of money and inflation eroding the value of what they do have, said Dr. Bonnie-Jeanne MacDonald, co-author of the report and director of financial security research with the National Institute on Ageing at Toronto Metropolitan University’s Ted Rogers School of Management.
But refusing to delay CPP, which is the safest way to protect themselves from running out of money, violates their biggest retirement priority, she said.
CPP payments are indexed to inflation and the payment amount is permanently increased by each month the first payment is delayed.
“Their own human brain is working against them because they’re so accustomed to thinking in the short term,” Macdonald said. “Unfortunately, retirement’s not the time to do that.”
A pension-back benefit of any unclaimed CPP would help retirees get over this mental obstacle, MacDonald said.
The benefit would also eliminate the breakeven bias as the breakeven point would always be zero, MacDonald said. The breakeven framing takes people’s attention away from long-term planning and encourages them to think in the short term.
In addition to overcoming a psychological barrier, a pension-back benefit would also make CPP more equitable as lower-income Canadians tend to die earlier and will get a larger death benefit, MacDonald said.
It could also improve intergenerational equity. With seniors living longer, they are more likely to run out of retirement funds if they don’t delay CPP payments, and may need financial support from their adult children.
“We could help them to make that better decision to double the money from CPP by delaying it. That’s not only going to make them happier, it’s going to make their kids happier,” MacDonald added.
The pension-back benefit would reduce benefit levels somewhere between 1.4% to 3.7%, depending on the retiree’s age, according to calculations in the report.
“There’s such a low probability that people are actually going to die before they’ve made back their money. The cost of this is very, very cheap,” MacDonald said.