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The longer you wait to use CPP and OAS, the more you could earn monthly. But with the recent boosts, is it more tempting to use these benefits?
One of the perennial chestnuts of personal finance is that retirees, or near-retirees, can boost government-provided pension benefits by delaying them until age 70, instead of 65 years old. This applies to both the American Social Security system and Canada’s triad of Canada Pension Plan (CPP), Old-Age Security (OAS) and Guaranteed Income Supplement (GIS).
In addition to that simple benefit-boosting tactic, Ottawa further boosts benefits with regular inflation adjustments and rare budget-mandated increases. The 2021 Canadian federal budget promised to boost OAS payments for seniors age 75 and older. And in July of 2022, it delivered on that promise, with a 10% increase, plus an additional quarterly inflation adjustment.
The National Institute for Ageing (NIA) confirmed in a news release that the increased OAS payments for Canadians aged 75 or older were the first permanent increase in almost 50 years. The NIA encourages retirees to defer their OAS benefits.
The NIA’s director of financial security research, Bonnie-Jeanne MacDonald and associate fellow Doug Chandler suggest that the best way for retirees to maximize these increases is to defer OAS benefits for as long as possible, by working longer or drawing on savings in the interim.
By now, most retirees know they can boost CPP benefits by 42% by delaying the onset of benefits from age 65 to 70, or 0.7% for each month of deferral after 65.
It’s less known that a similar mechanism works for OAS. Unlike CPP, which can start as early as age 60, OAS is not available before age 65. By delaying OAS by five years to the age of 70, you can boost final payments by 36%, or 0.6% more for each month you delay after 65.
The post-75 10% boost makes delaying OAS even more enticing. Before the increase, the NIA said average Canadians would “leave on the table” $10,000 by not delaying; but after this adjustment for pensioners aged 75 and older, they would now lose out on $13,000 by taking OAS at 65 instead of 70.
Retired actuary and retirement expert Malcolm Hamilton tells me this doesn’t mean deferring OAS is better than delaying CPP.
“The base OAS benefit increases, from one year to the next, at the rate of increase in the CPI,” he says. (CPI stands for consumer price index, which is used to measure inflation.) “The base CPP pension—payable to those who draw pensions at 65—increases from one year to the next at the rate of growth in the YMPE, which tracks wages, not prices, and which should increase at least 1.2% per annum faster than the OAS pension.” (YMPE stands for year’s maximum pensionable earnings, which is set by the federal government.) He further explains that, once you start to receive OAS or CPP, “the subsequent increases both track the CPI, but OAS is adjusted quarterly while CPP is adjusted annually.”
If you lack a traditional employer-sponsored defined benefit plan (DB), these wait-now, get-paid-more-later strategies can be of great benefit. Many private-sector workers lack the gold-plated inflation-indexed DB plans enjoyed by civil servants, politicians and many union members.
If so, the inflation-indexing that accompanies CPP and OAS is especially valuable, since delaying benefits also means you will be boosting the inflation-indexing, because it will be levied on a higher base figure and the 10% post-75 OAS increase and the 42% (CPP) and 36% (OAS) deferment adjustments are compounded.
MacDonald and Chandler note other reasons to postpone OAS, including reduced clawbacks of the GIS after age 70; and better OAS benefits despite clawbacks for those with more retirement income.
On point one, it says lower-income seniors wishing to avoid GIS income-tested clawbacks could draw down registered retirement savings plan (RRSP) and other registered savings to defer and boost OAS benefits, thereby preserving GIS payments after 70.
Second, those subject to OAS clawbacks may find the age-75-boost in combination with delaying benefits may increase benefits but not the clawbacks.
Third, waiting may mean more years of residency for those who have not lived their entire lives in Canada. To qualify for OAS, you must be a Canadian resident at least 10 years after age 18, so five extra years of waiting for benefits could add to the payout.
However, Chandler emailed me: “Someone with less than 10 years isn’t eligible for OAS at all, so they must wait. It’s more about OAS being prorated for those with less than 40 years of service,” and “you can’t double-dip.”
On the first point, Hamilton says, it’s true deferring OAS until age 70, and drawing more from a RRIF to compensate, means the RRIF income after 70 will be less and OAS pension more. “However, by not drawing OAS until 70, low-income seniors will forfeit the full GIS benefit before 70.”
NIA’s Chandler agrees retirees with low income should take OAS and GIS at 65, “but they might still be working because they can’t afford to retire.” He adds: “Or they might have a modest RRSP that will affect their GIS if they take it after their OAS starts. Our argument is that using an RRSP/RRIF to bridge to 70 can result in smaller GIS clawbacks after 70.”
Moshe Milevsky, York University finance professor and author, agrees with the thrust of the NIA’s analysis. “As Professor Larry Kotlikoff has been saying for decades: delay, delay, delay […] this economic idea is being imported to Canada.” Read more about Kotlikoff.
However, Milevsky wonders why Canadians seldom act on this advice: “Why aren’t financial advisors more vocal in advocating delay?” He points to the familiar dynamic that the financial industry often benefits from more rather than less assets under management. “There is an inherent conflict of interest nobody talks about. They don’t want you to decumulate financial wealth too fast.”
There is a deep fear that governments are constantly changing rules and the tax rates, so eventually “wealthy” Canadians might be asked to pay more income tax. “Those larger delayed CPP and OAS payments might be taxed more onerously.” Also, Milevsky says, Canadians in poor health may want to think carefully about delaying their CPP and OAS payments. “The entire CPP and OAS system is supposed to be ‘actuarially neutral,’ using a long-term investment assumption. How can everyone benefit? Did the actuaries at CPP and OAS build it wrong?” (Actuarially neutral means the benefit of working an extra year comes only from the extra year, not other factors.)
To this, MacDonald says, “the CPP is operating on much more lucrative assumptions than are available to individual retiring Canadians. That’s the beauty of a large pension plan.”
Hamilton’s take is that Ottawa’s inflation-adjustment factors didn’t fully consider substantially lower interest rates. From a public policy view, this means “the ‘winners’ are affluent people, in good health, who can afford to defer. And the ‘losers’ are lower-income, less-healthy people without the luxury of being able to wait [until age] 70 to draw a pension.”
Those who expect to rely on OAS and CPP as the main engine of their retirement income should realize both behave like life annuities: guaranteed income for life. Such longevity insurance pays out no matter how long you live and it shelters you from stock-market risk (not to mention interest-rate risk these days). One of the pluses of rising interest rates in 2022 is that annuities are becoming more attractive. For more on that, see my recent Retired Money column on annuities.
We’ll close with Hamilton’s broad recommendations.
Generally, “if you cannot easily afford to defer your OAS [or] GIS benefits, don’t do it.” And Hamilton advises, “If you can afford to defer, but your health is not good—i.e., there is reason to believe you will not live into your 80s—don’t defer your benefits.” And “if you are affluent and healthy, defer your CPP and/or OAS pensions for as long as you can, if interest rates are low—as they have been since 2010. And draw upon your pensions at age 65 or earlier, if interest rates are high—like they were in the 1980s and 1990s.”
However, he cautions, the optimal answer depends on family composition and income sources for each family member, among other things.
Jonathan Chevreau is the Investing Editor at Large for MoneySense. He is also founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected].
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I took my CPP at 60 and glad I did. I’ve already received over $42000 after tax ( I’m 65 now) I dont think I will live much past 80, heart issues and diabetic. Best decision ever plus I get full OAS now too. Don’t save the Government money take everything you can get as soon as you can. No ones life is guaranteed. I have known people who deayed payments and ded before they got anything!!!
By taking benefits at age 65 you would receive about $100,000 by the time you are 70. This is assuming you you are receiving $1500 a month in benefits and invested in bank stocks giving a 4% dividend. The extra $620 you get by waiting until you are 70 would mean you would have to live till you are 78 to break even. Only after that time would you start to see any benefit. With the average life expectancy for males being 79.8 you would ha almost 2 years to enjoy all that extra income!
There is a lot in play when making the decision to defer OAS and CPP. With respect to OAS however, assuming you don’t need the benefit, why not take it now and invest it? If my calculations are correct, if my wife started collecting OAS at 65 and invested the max amount ($6000 /year) into a TFSA compounded at 5%, the value of those contributions would rise to approximately $43,000 at age 70 and generate approximately $2200 /year or about $183/month from 70 years of age onward. The $183/month plus the current max OAS of $666.83 works out to $849 /month or $57 dollars less per month than the current max OAS payment at age 70 of $906. I know everyone’s situation is different but for us, leaving guaranteed monies on the table seems to be more risky especially when you consider that there are no survivor benefits for OAS as they end upon death.
My wife is already collecting her CPP which is less than the maximum. I’m am eligible for the maximum CPP but considering deferring to 70. What Happens if I die before 70 or after 70 in regards to my wife receiving the maximum single benefit? Will it be the new amount that I would have received at death or at time I live past 70 or is it based on the single maximum benefit at age 65?
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
The majority of articles on this topic seem to favour delaying your government benefits especially if you don’t really need the money sooner. I didn’t delay mine for three reasons. Firstly, I don’t know how long I will be around to collect my benefits so delaying could significantly reduce the total amount to be paid out. By my calculation I have to live into my mid eighties to break even (collect at 65 versus delay to age 70). . Might be better to grab the money while you can. Secondly, by collecting my benefits sooner even when I don’t need it, I can invest the money into a TFSA and build up quite a nest egg. It would take quite some time for future excess benefits to catch up. Thirdly, why wouldn’t I want the money now while I am in good health and can enjoy it. Why postpone it to a time when I might have physical limitations and fewer reasons to spend the money. Yes, the math favours deferring, but it is not the only reason to wait. Expected life expectancy, building a nest egg, or simply enjoying the money while you can out rank the math.
Do you still get more money in CPP and OAS by delaying if you’ve retired early and no longer contribute to these future benefits? In my case, this would be at age 57 after having worked full-time for 32 years.
Thank you for the question. We invite you to email it to [email protected], where it will be considered for future articles.
Toss a coin. There’s not one answer to thousand of situations. You cannot read tomorrow’s newspaper. I just told one client to defer 2.5 years because she doesn’t need it now. On the other hand, a distant relative DESPERATELY needs both.
In these hard time I believe anyone living on cpp and old age pension should get extra money to he able to carry on. Myself it’s hard enough trying to pay rent etc. I can’t afford my medications plus food so I go without alot.
I would suggest that for those relying on the financial industry service providers that the government both federal and provincial examine whether this will simply mitigate the harm from trailing fees and deceptively worded liability disclaimers when retail investment accounts are opened rather than put extra wind in the sails of those who can afford to defer
For example the Ont AG noted that the osc footdragging on fees for many years had cost the public billions. Which suggests serious conflicts of interest with the osc now being paid by industry.
That extra largess went into industry coffers rather than remaining to potential accumulate in the public’s.
So even now that is is finally being sorted how long before the federal will mitigate this drain?
Today’s $100 may become $50 in 10-15 years of deferral. If you are not reach, as most of us, take it all as early as possible if you need it.
Clearly!! I MUST be missing something: you’re better off to leave $ 40,000.00 ( of your own money that you’ve pre-paid thru your pay deductions/ taxes) sitting on the table?? 4 real?
$666.00 a month @ 65 = $ 7,992.00 @ year. Between 65-70 nets you $39,960.00 minimum.
These are the self same 5 years that you are most likely to be the healthiest/ most able and mobile ever again in your lifetime.
Don’t need the $$ – put it in a GIC, even at a modest 3% interest rate, yes, inflation will eat some of that – SO WHAT? Who knows when the qualifications are going to change? After all the country is not exactly in great financial condition (whole new topic)
Yes, it’s still true: A bird in the hand IS ALWAYS worth an entire flock in the bush!
This is taxable income, the more you get the more you’re taxed, the higher tax bracket you fall into. And keep in mind that getting more money later in life will only be taken by the nursing home (cost is based on your income)/ or you’ll loose out on other benefits you would have been entitled to/ or the relatives will enjoy it. Just saying 🙂
May be time to start thinking outside of the box with pensions.
Not sure if this is exactly the answer but what worked 60-70 yrs ago is inefficient/costly/archaic in this day and age.
Why do companies/govs still manage employer pension plans with all the available technology of today?
Canadians when first beginning employment (16-18 yrs of age) should be compelled to open a locked in (till 60 – 65 yrs of age) retirement account (LIRA) with their financial institution so employers as well as the employees can directly deposit monthly employment pension contributions (compulsory), thus removing the need for companies/govs to manage/control employer pension plans.
This would also eliminate the chance of any employee losing their pension in the event of company bankruptcies, as the employee would hold all retirement contributions in their account from day one of employment.
Change jobs, the new employer just continues to deposit pension contributions to the employee’s retirement (locked in) account.
This option may even entice more employers to offer matching retirement contributions to attract/retain employees, as the cost of managing/administrating such a program would be minimal to the employer (less cost for employees as well – these plans cost significantly to manage & it comes out of our earned principal to do so).
One has to wonder how many pension plans all doing the same thing are out there that could be managed by our highly regulated financial institutions which would reduce members costs, thus increasing returns.
Financial institutes could even offer different investment vehicles (depending on age) for the account holder (as a person ages the investment vehicle’s to be offered/available would be much less volatile).
Makes little sense that an employer pension plan is managing a 20 yr old member’s contributions the same way they’re managing a 50 yr old’s, which currently is happening with all (employer, government) pension plans. Obviously a 20 yr old’s plan should be much more weighted towards growth than a 50 yrs old’s. That early growth can make huge differences (compound interest) to a 40-45 year investment.
Once reaching the age of 60 – 65 the employee would then sign off on an annuity type vehicle with their principal (a principal that would be much, much higher than what most pension plans are achieving now).
– 90 yr avg of the s&p (10%)
– 50 yr avg (since inception) of the nasdaq (13%)
– we all know how real estate has done the last 50 yrs.
Could even see this option working for CPP as well.
Actually, the more I think about it cpp should most certainly adopt this format.
Don’t get me wrong, I’m a believer that strong social programs are only beneficial in a civilized society but cpp is not a social program (in my view).
Basically, the gov is taking our money & investing it for us (@ avg to below avg returns), why?
They’re just a middle man we no longer require with the technology of today.
Govs are there to set policy, manage our tax revenue & provide those all too important social programs.
With cpp, they could set policy for employers/employees/financial institutions to follow (plans/contributions levels) then get out of the way!
Imagine the much-overburdened tax payer would be happy to eventually see a whole gov dept eliminated (again, transition would take time but it wouldn’t be a challenging task).
There’s no stopping technology, believe it’s only a matter of time before this type of format is adopted.
Eventually everyone will have employer/employee pension & cpp (LIRA’s) apps right on their phones to view at will.
Canada can be a leader here by doing what’s best (financially) for its citizens in a timely manner or become a follower once again.
Current cpp maximum payout at 65 – $1253, the average – $727.
Seniors deserve better.
Something to think about, feel free to share!
Taking it later makes you more money but also increases your income at which point you can become inelligble for the government handouts because you won’t qualify because you did them a favour and made too much to qualify! Grab what you can tomorrow is not promised! and playing with the government is like playing the house at a casino you don’t win in the long run. Saving RRSP’s why register any of your after tax dollars putting them into RRSP’s so you can be taxed a second time when you take it out as income again being denied governmet benefits for seniors that you would otherwise be entitled too if you had not worked so hard to disqualify yourself! The trick is stay poor on the paper and save your cash unregistered to use when you want. Too much income you are not eligible for 55+ subsidized housing or will pay the max and the same people who did nothing will be your neighbours anyway wether in the housing or the care home you all end up the same do whats best for you.
If you are among the majority of seniors who qualify for the GIS, you have some more factors to consider.
When it comes to employment income or RRSP/RRIF, every dollar can and will be used against you and clawed back at either 50% or -gulp- 75%. In that case you are better off delaying OAS/GIS. Delaying OAS will not reduce your GIS. Delaying CPP will reduce your GIS later, working will reduce your GIS now.
TFSA and unregistered savings will not be decimated by clawback.
Here is my plan to attempt to escape the RRSP and GIS trap if I can’t work until 70:
1) Prioritize saving in a TFSA over RRSP as long as I can still work.
2) Delay CPP to 65 if I can, using the RRSP I already have accumulated. I will get most of my withholding tax back on my income tax return because this will be my only income and I will be low-income.
3) Once I reach 65, first delay both OAS and CPP if there is anything left in the RRSP. This time I might be able to get all my withholding tax back because seniors have more tax credits
4) If the RRSP runs out before age 70, take OAS and GIS and use the TFSA to delay CPP. $125 from my TFSA will replace $500 from the CPP because unlike CPP, the TFSA withdrawals are not clawed back.
A lot of people who scrimped and saved in an RRSP are now getting shafted with the GIS clawback, try not to end up with the same fate.
So, we took advise based on the KISS (‘Keep It Simple Stupid’) system, as recommended to us by an actuarial friend, to whom we’d presented that very question. And his point was, that you don’t know how long you’ll live and that weighing odds and placing bets, should remain to folks attending horse races.