1. Assuming that Neil lives another 21 years (the life expectancy of a 60-year-old male), what is the economic value (at the beginning of 2009) of the reduced pension if money can earn 6% compounded annually?
2. What will Neil’s initial pension be if he waits until age 65 to start receiving it?
3. What is the economic value (at the beginning of 2009) of the full pension if Neil receives it for 16 years from age 65 to age 81? Again use 6% compounded annually for the discount rate.
4. Compare the economic values. Which choice should Neil make?
5. Repeat Questions 1, 3, and 4 assuming money can earn only 4.5% compounded annually.
6. The Department of Finance Canada issued an Information Paper in May of 2009 announcing that federal and provincial finance ministers have recommended changes to the Canada Pension Plan. These changes include increasing the early-pension reduction from 0.5% to 0.6% per month. The proposed change would be phased in over a five-year period from 2012 to 2016 inclusive. Repeat Questions 1 and 4, assuming that a 0.6% per month reduction is currently in force.
Subject to certain restrictions, you may elect to start collecting the Canada Pension Plan (CPP) monthly Retirement Pension at any time after you reach age 60. The payments are then reduced by 0.5% for each month the pension is collected before age 65. For example, if the pension starts at age 60, the monthly payment will be decreased by
(5 × 12 months) × (0.5%) = 30%.