Why many Canadians have a ‘gambler’s mentality’ when taking their CPP benefits

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Advisers should stop oversimplifying the decision about when Canadians should take their Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) benefits and avoid using “problematic narratives” that may lead people to take the benefits too soon, a new report argues.
Some of those “flawed” narratives include, “You’ll be better off taking CPP/QPP benefits at age 60 if you die before your break-even age,” “What if the government changes its mind? Take advantage while you can,” and “Take it and invest it – you’ll do better,” according to the report, Retiring Problematic Narratives, released Wednesday from the National Institute on Ageing (NIA) at Toronto Metropolitan University.
“Some of these justifications for early claiming have elements of truth, but they are largely unfounded,” states the paper from lead author Bonnie-Jeanne MacDonald, the NIA’s director of financial security research, and co-author Doug Chandler, an actuary and NIA associate fellow.
While some Canadians need to take CPP benefits earlier, the report states that a large majority of Canadians (about 90 per cent) choose to take their CPP/QPP benefits by the age of 65, which “reduces the lifetime income security they say they want and will most likely need.”
The report says people in “positions of influence,” namely financial advisers, pension plan sponsors and policy makers, should be doing more to educate Canadians about when to take their CPP benefits based on individual circumstances instead of relying on “troublesome mainstream justifications” to take it early and psychological biases that can distort decision-making.
“By offering easy justifications for early claiming, these existing narratives do a disservice to the public. But it’s not enough to simply add good reasons for deferring; we need to change the overall narrative,” the report states.
The authors don’t blame retirees for taking CPP benefits too soon. Instead, they point to “bad advice and biased perspectives” that can cause some people to make short-term decisions without considering long-term factors such as personal health and finances at later ages – and even emotions – around retirement.
“The CPP/QPP claiming choice is difficult and has not been explained well to date,” the report states. “It’s a once-in-a-lifetime, high-stakes financial decision that requires evaluating a wide range of uncertain future events, particularly financial market returns, inflation and age of death.”
Here are three “problematic narratives” cited in the report:
Many Canadians cite their “break-even age” when deciding when to take their CPP benefits. It’s when the cumulative amount from taking CPP benefits later – and receiving a higher monthly payment – catches up with the lower monthly payments received when starting CPP earlier. The report describes it as a widely used “mental shortcut” and a “bet” on when a retiree expects to die.
“This framing arouses a gambler’s mentality, where the focus is shifted to the risk of not living long enough to ‘break even’ and away from the more relevant risk of being unable to safely finance retirement over the long term without running out of money,” the report states. “Instead of informing the CPP/QPP claiming decision, it caters to short-sighted, fear-based natural human psychological biases, fosters financial illiteracy and discourages retirees from supporting their long-term financial well-being.”
The authors call on the financial services industry to “break the break-even” discussion, adding that “financial planners are excellent candidates to champion this change.”
Many Canadians take their CPP/QPP benefits early, fearing the funds might not be there down the road – either because the money runs out or the government changes the rules.
The report argues that the CPP/QPP is the “safest element of Canada’s retirement income system,” citing assessments from Canada’s chief actuary that the program’s contribution rates are sustainable for at least the next 75 years.
“CPP benefit provisions can’t be altered by a single government acting alone, its assets can’t be misappropriated, and the investments are not concentrated in Canada or any other single country,” the report states. “The CPP/QPP funding model is exceptionally long-term and diversified in its funding sources.”
Many Canadians collect CPP/QPP benefits early and invest the funds, believing they can generate better returns. This is another risky bet, the report states.
“This argument relies on unrealistic assumptions that contradict basic financial principles,” the authors say. “It assumes that investing early CPP/QPP payments will yield a fixed return above the risk-free rate without the associated risks of higher-yielding assets.”
The authors also say the “take it early and invest it” argument has the same gambler’s mentality as the break-even age approach that “conflicts with established standards for sound retirement financial planning.”
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