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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).
OAS gets a 10% boost for those aged 75+
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.
Is it worth waiting for CPP and OAS until age 70?
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.
Delaying CPP vs delaying OAS
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.
Different perspectives on clawbacks
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.”
Do we really know the future? Ahem, changing rules and tax rates
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.
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.