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May 31, 2012

Reforms underway to the Canada Pension Plan (CPP), which impose higher penalties for opting to receive CPP before age 65 and greater rewards for delaying take-up until after 65, were meant to ensure people do not have a strong financial incentive to retire early and take-up CPP at age 60, according to a report from the C.D. Howe Institute.  In “Comparing Nest Eggs: How CPP Reform Affects Retirement Choices,” authors Alexandre Laurin, Kevin Milligan and Tammy Schirle  find that once the interaction of these age-based CPP adjustments with the tax system is taken into account, some lower-income Canadians will still have financial incentive to retire early, because they face penalties if they don’t.

“Overall, the reform is a step in the right direction, and enhances the flexibility of Canadians to work longer without being penalized for their choice,” said co-author Kevin Milligan. “But on an after-tax basis, for Canadians who collect Guaranteed Income Supplement (GIS) and have no other separate source of income beyond CPP, pension wealth is maximized at age 60, on average, and is reduced from there on.”

 

Alexandre Laurin

Alexandre is the Vice-President and Director of Research at the C.D. Howe Institute. 

As part of his duties, he leads the Institute's Fiscal and Tax Policy Program. 

Kevin Milligan

Kevin Milligan is Professor of Economics in the Vancouver School of Economics at the University of British Columbia, and is also affiliated with the C.D. Howe Institute and the National Bureau of Economic Research. Since 2011, he has served as Co-Editor of the Canadian Tax Journal.

Tammy Schirle

Tammy Schirle is a Professor in the Department of Economics at Wilfrid Laurier University. She is also a Co-Editor for Canadian Public Policy, and a board member for the Canadian Labour Economics Forum. A member of the C.D. Howe Institute’s Pension Policy Council and Human Capital Policy Council, she previously served as the Institute’s Roger Phillips Scholar of Social Policy.