In my last posting, we examined recent changes to the Canada Pension Plan (CPP).Today, we’ll look at CPP’s closely related cousin – the Old Age Security (OAS) program.
OAS is a monthly benefit payable to individuals who are at least 65 years of age, who have resided in Canada for at least 10 years of their adult life (that being 18 years of age or older). Different thresholds of eligibility apply to individuals who have spent some of their adult life abroad; however, those nuances are beyond the scope of this posting.
At the time of writing, the maximum OAS benefit payable to an eligible individual is $6,880.44 (or $573.37 per month). This level is subject to a clawback, based on an individual’s net income. Specifically, for every dollar that one’s net income exceeds $73,756, their OAS is clawed back $0.15. In case you haven’t worked through the math yourself, once a person’s net income reaches $119,398, their OAS will be completely clawed back (reduced to zero).
As such, this article won’t apply to everyone. For retirees who are lucky enough to draw a fair sized pension, OAS might be an afterthought. That said, if you are entitled to OAS, you must decide whether or not to defer receiving it. If you so choose, you can defer your OAS payments until age 70. There’s a monetary benefit in doing so. That benefit is as follows: for every month that you defer beyond age 65, your OAS entitlement will increase by 0.6%. If you defer for the full 60 months (5 years x 12 months), your OAS benefit would increase by 36% (60 months x 0.6% per month).
On the surface, this may seem like a great deal. But, much like the recent changes to CPP, the decision to defer is a tradeoff – and a bet against one’s own health and longevity. As I mentioned in my previous posting regarding one’s option to take CPP early, most people aren’t willing to defer. They simply prefer the certainty, and the more immediate cash receipt, as opposed to receiving more at a later date.
There is a point at which one will break-even via deferral. The following chart illustrates what your cumulative OAS would be throughout your golden years, under your two extreme choices – taking OAS as early as you can, versus deferring it as late as you can:
As you can see, an individual receiving the maximum OAS benefit would break-even around age 82 (which, coincidentally, is the approximate average life expectancy here in Canada).
There are other things to consider besides health, longevity, and whether or not you might be subject to a clawback of your OAS. Such things include cash flow needs, your individual income tax rate, inflation, and perhaps even your overall confidence in the government’s ability to pay OAS. So before you decide to follow the herd and accept OAS as soon as possible, you may want to examine your financial plan with an expert to ascertain which option is truly in your best interest.
Personable and professional, Brent Soucie specializes in cross-border tax and financial planning for U.S. citizens and/or Green Card holders residing in Canada, as well as Canadian residents with U.S. employment and/or property. His clients include professional athletes, entrepreneurs, and corporate executives.
These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.