You know you’re getting older when, instead of BYOB and TGIF, your friends are talking about CPP and OAS. How do they work? How much do they pay? What’s the difference between them? And what choices do you have? Find out and join the conversation.
What is CPP?
The Canada Pension Plan (in Quebec, the Quebec Pension Plan) is a defined-benefit pension plan administered by the government. It was established in 1965.
What is OAS?
Old Age Security is a federal government benefit program. It began in 1927 as the Old Age Pension, with the cost shared between the provinces and Ottawa. In 1952 it was replaced by the federally funded Old Age Security pension.
Who can get it?
CPP: Anyone who has contributed to the plan for at least one month while working in Canada.
OAS: Canadian citizens or legal residents age 65 or older, who have lived in Canada for at least 10 years since the age of 18. Your employment history has nothing to do with your OAS benefits.
Where does the money come from?
CPP: Contributions you and your employers have made over the course of your working life, plus (since 1997) investment income managed by the Canada Pension Plan Investment Board.
OAS: General tax revenue.
How much does it pay?
CPP: The amount you get depends on how long and how much you contributed. The more money you earned, and the longer you worked, the more CPP you will get. Most people don’t contribute enough to get the maximum payment, which, in 2022, is $1,253.59 per month. The average payment for someone starting in 2021 was $702.77 per month. If you have other income, that doesn’t affect your CPP payments.
OAS: The amount you get depends on how long you’ve lived in Canada beyond age 18. You reach the maximum ($642.25 per month as of January 2022) with 40 years’ residence. OAS payments increase slightly every three months. Also, if you are 75 or older, you’ll see a one-time, 10% increase in July 2022.
Is it taxable?
CPP: Yes. It’s treated and taxed as income. If it’s the majority of your retirement income, you’ll pay little or no tax.
OAS: Yes. OAS payments are taxed as income. As well, people with higher incomes must give back some or all of their payments. You may have heard it called the “clawback.” The official name is the OAS pension recovery tax.
Let’s say you get the maximum payment (in 2022, $642.25 per month or $7,707 per year). The Canada Revenue Agency requires you to repay 15% of the difference between the repayment threshold ($81,761 in 2022) and your net income above that threshold.
The actual amount you repay increases along with your income. If your net income is high enough ($133,141 in 2022), that 15% will take back your entire OAS payment.
Here’s the math:
$133,141 - $81,761 = $51,380
$51,380 x 15% = $7,707
$7,707 - $7,707 = $0
Can you count on it?
CPP: Yes, thanks to two sets of major reforms.
In 1997, the issue was demographics. As the Canadian population aged, the ratio of workers to retirees was declining. To prevent the plan from running out of money, the government doubled the contribution rate to create a reserve. They also set up the Canada Pension Plan Investment Board to manage and invest the reserve fund.
In 2016, the issue was benefits. Fewer Canadians had company pensions, and the concern was that CPP benefits weren’t enough. So, the federal and provincial governments negotiated a phased-in increase in contributions that will raise the maximum annual pension.
OAS: There has been some concern about the ongoing cost of the OAS program, as it’s funded by today’s taxpayers. In 2012, the government announced the eligibility age would gradually rise to 67, but after an election, the new government scrapped that plan.
What other benefits does it provide?
CPP: It also pays a disability pension, a survivor’s pension for widows, widowers and underage children, and a small death benefit.
OAS: If you get OAS payments but your annual income is still very low, you could be eligible for the tax-free Guaranteed Income Supplement.
When can you start getting it?
CPP: Any time after reaching age 60. If you start taking CPP at 65, you’ll get the full payment you’re entitled to. For every month before 65 that you start, your payment will be 0.6% less. For every month you wait after 65 but before 70 to start, your payment will be 0.7% more.
OAS: Age 65. You can’t take it early, but you can push it out as far as age 70 to get a higher monthly payment. For each month past 65 that you delay starting OAS, your monthly payment will increase by 0.6%.
How long can you get it?
CPP: Once you start getting CPP payments, they will continue for the rest of your life.
OAS: Like CPP, OAS payments will continue for the rest of your life.
How do you apply for it?
CPP: You can apply online two or three months before you want your payments to start. You’ll need a My Service Canada Account (MSCA). It will take a week or two to process your application. You can also apply on paper, which will take up to four months to process.
OAS: If Service Canada has your details on file, they will automatically enroll you at age 65. When you turn 64, they’ll notify you about enrolment and ask you for more information if they need it. To defer your payments past age 65, make a note in the automatic enrollment letter and send it back to Service Canada. Didn’t get a letter? You can apply online or by mail.
Two more questions to think about
These questions have clear answers. But there are a couple of very important questions with answers that aren’t so clear. Different people will answer them differently.
When should you start taking CPP?
This is likely the biggest question your friends are asking about CPP. The answer will depend on several factors, including:
- Your other sources of income.
- Your life expectancy (based on your family history, current health and lifestyle).
- When you’ll need it.
- Your break-even point. If you delay, that’s the date at which the higher total payment you get catches up with what you missed by delaying. If you live beyond the break-even point, you’re ahead. If you start early, you break even when the lower total payment you get equals what you gained by starting early. Any time after that point, you’re behind.
How do you avoid the OAS clawback?
And here’s the biggest question about OAS: How do you dodge (or at least minimize) the clawback? Since you can have a total net income of $81,761 in 2022 before the government starts taking your OAS back, this might not be an issue. But what if you have a company pension and retirement savings along with CPP and OAS? In that case, you might want to make a plan to keep from straying farther than necessary into clawback territory. Here’s where some expert advice about how and when to draw your retirement income would come in handy.
Get some advice on deciding when to start taking CPP and OAS – meet with a Meridian wealth advisor. We can help you find out when your break-even point is, and how to minimize the OAS clawback.