Updated: Sep 21, 2021
CPP (Canadian Pension Plan) and OAS (Old Age Security) are government supported income programs everyone in Canada has access to. In order to receive CPP, you and your employer have to contribute into it during your working career. CPP can be taken anytime in the year of your 60th birthday, and can be deferred anytime up to the end of the year you turn 71. OAS, unlike CPP, is available to every Canadian when they reach age 65, and can also be deferred until age 70. There are differences in the entitlement dollars and rules for these programs based on your contributions and/or deferral plans, but they both have two things in common. They both grow in the annual amounts you will receive the longer your defer them, and they are both adjusted to inflation annually. This makes them a time-tested and reliable source of income for seniors and retirees, and will ultimately influence your decisions on when to apply and begin drawing from them.
CPP (Canadian Pension Program) was instituted in 1965 in it’s infancy, and has had several changes over it’s life. CPP allowed working Canadians to contribute a percentage of their gross (before tax) dollars into the CPP investment pool, and employers to match that amount. If you are self-employed you can contribute double the maximum amount allowed under employer-matched program, as you are contributing on behalf of yourself and the employer. The contribution rates have changed over the years. In 2021 you can contribute 5.45% of your gross income between $3500 and $61,600 up to a maximum of $3166.95 per year. If self employed you can contribute up to $6132.90. The amount you contribute into the program determines the amount you will receive when you begin drawing on it. In 2021 the maximum CPP payment per month is $1203.75 ($14,445 per year), but the average payment made to Canadians is only $650-700 per month. This is be cause many people are unable to contribute the maximum annual amounts due to varying income levels or gaps in employment, therefore will not receive the maximum payouts in retirement. You can find out how much your CPP entitlement is if you start withdrawing it today by signing in to your account using a sign-in partner at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-individuals/account-individuals.html . The most important thing to know about CPP, other than you can begin taking it any time in the year you turn 60, is that it increases substantially the longer you defer withdrawals. For every month you defer CPP after age 60, your payment increases by ~0.5% or 7.2% per year. By age 65 this equates to a 36% increase in your payment. And it just gets better. If you defer til you turn 70, the payment goes up further by 0.7% a month, resulting in a 8.4% annual increase, or another 42% bump-up at age 70. That is a substantial raise in your income over time, and don’t forget the payments are adjusted to inflation, so it is inflation-resistant income! If you are receiving the maximum CPP benefit and defer your application until age 65 you will receive ~$1637 per month (36% more), and if you leave CPP withdrawals to age 70 you will receive ~$2324 per month (an additional 42% more)! You’ll never get a raise like this at work!
This information is crucial in deciding when you want to take CPP. Taking it early means less per month, and taking it later means more per month. In order to decide what works best for you, you need to have a 20-30 year withdrawal plan that reviews all your sources of income, the drawdown rates, expenses, mortality factors, and your estate plan (what you want to leave to loved ones or charities). In the end, it really all boils down to “do I need the income now or not?”. You may have sufficient income from other sources like company pensions and/or RIFs that you need to draw down sooner rather than later to avoid higher taxation or OAS clawbacks post age 65-71. Adding CPP and OAS into the mix early might increase your income between ages 60-70 to levels where higher taxation or ability to draw other income sources down becomes a factor. by the end of the year you turn age 70 you must convert all RRSPs to RIFs and begin drawing them down at the rates prescribed by your age. CRA is a tricky bunch, and if you leave significant value in your RIFs til age 70 you will be forced to withdraw them at 5% per year, and this rate increases exponentially every year as you get older. If you defer drawdown of your registered savings too long, this can create a challenge in later years avoiding taxation when all these programs are forced to kick in by the government. It can also trigger OAS clawbacks. It can become even more challenging if one spouse dies prematurely in your 60s-70’s, as you will lose the tax-slaying, income-splitting benefits that comes with married or common-law couples. It may better to get your money out of RRSPs earlier rather than later.
When I asked my parents why they took CPP early at age 60 their answer was, “because we were scared we were going to lose it!”. I could have rolled over and gone with this analogy, but I try not to let fear drive my decisions, but rather to be cognizant of when fear is taking over, and use it to drive my desire for information and data. https://www.cppinvestments.com/commitments/busting-myths-about-cppib-and-cpp
My parents started drawing CPP in the late 1990’s as soon as they qualified for it, and were in a growing number (herd) of Canadians fearful of losing CPP at the time. But with all things financial, fear and the herd mentality can be the wrong motivator for future decisions. I understand their fears at the time, and it worked out for them, mostly because their RRSP pot was not big enough to be concerned with early drawdown, plus they had access to a reliable and sizable indexed company pension (defined benefit plan), which is virtually unheard of today, that supplemented their other sources of income. Today, the CPP is well-managed, sizable, and very reliable. https://www.newswire.ca/news-releases/cpp-investments-net-assets-total-497-2-billion-at-2021-fiscal-year-end-813839839.html
Personally, I believe the longer you can defer drawing CPP the better, but this is different for everyone. The main factor in this decision for us was the ability to drawdown funds in our registered programs in the years leading up to and into our 70’s in a tax-efficient manner. Not only does it increase your income from CPP the longer you leave it, but if/when you die, there will be an increased survivors’ benefit for your spouse. Not known by everyone, but the CPP benefit is not completely lost if you don’t apply for it before death, but rather, it automatically kicks in at time of death for the purpose of survivor benefits. Some believe if you do not use it you lose it, but this is not entirely true if you have a surviving spouse. They may be eligible for up to 2/3’s of the deceased spouses entitlement as a survivor benefit, depending on their age and the amounts the deceased spouse was entitled to. If you are younger than 65, you will recieve 37.5% of your spouse‘s entitlement plus a flat rate of $199.31 at time of their death. And, if you are older than 65 you will receive 60% of your spouse’s entitlement. Of course, if you are single, there are no spousal survivor benefits afforded. Also notable, if you you have dependent children meeting the CRA requirements, they may also be eligible for a portion of your CPP benefit.
OAS (Old Age Security) in it’s infancy was established provincially in 1927 in Canada to provide means-tested income to all seniors over the age of 70. The OAS act was later introduced in 1952 to provide a means-tested plan in which the federal government shared into. OAS is taken from the general revenue generated by the Canadian government. Today, the OAS program allows any Canadian to draw income from it at age 65. OAS, unbeknownst to many Canadians who are new retirees, can also be deferred until age 70, which also increases your OAS payments substantially. Allowing OAS payment deferral was started for anyone retiring after July 1, 2013, so it is still a relatively new option. Somewhat like CPP, but starting at age 65 (not 60), Canadians can defer their OAS payments and will receive an additional bump in payments by 0.6% for ever month or 7.2% for every year it is not taken. This is also a 36% increase by deferring payments for 5 years until age 70. To put this in perspective, in 2021 the OAS payment, if taken at age 65, is $626.49 per month. If you leave taking OAS payments til age 70 you will receive $852.02 per month (36% more), adjusted to inflation annually. It is also notable that if you intend to defer OAS, you must arrange this option with the CRA early (before 65) as this benefit can automatically start at age 65 without application, and once it’s started it cannot be reversed. You can elect for OAS deferral with the CRA in your MyServices account, using a banking partner for sign-in. CPP must be applied for through your myCRA account, while OAS does not (currently) require any application to start. So you must remmeber to go into your MyService account and defer it before it starts at age 65, or you will lose this option. Similarily to CPP, OAS payments may impact your decisions to take them early or take them later, to allow drawdown of other sources of income in a tax efficient manner or other needs.
OAS also has a unique feature not imposed on CPP which may impact your decisions on withdrawal plans and timing. OAS payments are subject to government clawbacks if you make too much income. While this may seem like a difficult problem to have, you need to be making quite a bit of money by normal standards from other sources for these clawbacks to kick in. As the program sits today in 2021, OAS clawbacks of $0.15 are applied for every dollar in excess of $79,845 in net income, with OAS being fully clawed back at a net income of $129,581. This is net income per person and not per household, which further boasts the benefits of drawing down your assets while you are married (not widowed). If you and your spouse have equalized your income-splitting options through your savings years by balancing personal and spousal RRSPs, you will very likely be able to stay under the clawback amounts that are applied above $79,845 net income each by equally splitting your incomes during your decumulation phase.
CPP and OAS provide reliable and key income sources for all Canadians in retirement, and your knowledge of how these programs work is very important to timing the payments and receiving the maximum benefits from them. The challenges faced by all Canadians in decumulating savings and managing income in retirement are subject to many factors, and there is no one-plan-fits-all approach this. In this BLOG I have tried to show the base and maximum amounts that might be achieved today, and some of the influences that may impact your decisions. The majority of Canadians will fall between these amounts, and some may not be eligible for CPP at all. The factors affecting what you will ultimately receive from both CPP and OAS includes your eligibility for CPP amounts, and your entitlement payments for both CPP and OAS based on your age at the time of withdrawal. To decide when to take CPP and OAS you will need to review your overall decumulation plan, your personal mortalities, your individual ages, and your tax efficiency strategies (e.g. ability to income-split). If you are 5-10+ years older than your significant other, the timing of these benefits is affected significantly and requires a bit more thought into the withdrawal timing strategies, as you will become eligible at different times. A major difference in your ages may also put your income splitting strategies at risk, if you delay too long. Potentially dying years before your younger partner will cause you to lose income splitting option earlier.
If you are married, of the same age, and you are both entitled to the maximums for CPP, and both CPP and OAS are taken in unison at age 65, you can easily see together they provide a substantial, additional source of time-tested income. If both spouses are receiving the maximum benefit at age 65, the total annual income from these sources total $54,325 per year, or ~$4527 per month! (~$39,290 from CPP and ~$15,035 from OAS!). If you can both defer them until age 70 they will give you a huge income cushion that is very likely to support all your base expenses if you are moderately frugal. If you are both getting the maximum benefit, and you both deferred payment of both programs until age 70, today you could receive a combined ~$76,224 a year, or $6652 per month! Just remember that these numbers are assuming both spouses are entitled the maximums from CPP, and your own entitlement from these programs needs to be considered in your decisions for the timing the withdrawals.
There are a couple other things to know about these programs. Firstly, they are both gross amounts and subject to income tax on withdrawal. You can set up with the CRA to withhold taxes at source if you want. Secondly, they are both unavailable for pension splitting. However, CPP has a similar program called pension-sharing which allows splitting up to 50% per year, but only for the value you have earned while you were together. This split must be made through an annual election to the CRA using form T1032 and the percentage of the split can be changed when filing taxes every year to benefit your overall tax return. However, it is a bit complex, and using an accountant is probably advised, especially if you were divorced and remarried.
I have to qualify, I am not a financial advisor, so you should always check the facts and your own understanding of these programs against what is written in here. All these programs get periodic updating by the CRA so what is true today may not be true tomorrow or next year. I am simply sharing my own understanding and decision-making factors as a DIY investor and DIY retiree. Your plan may vary widely from others. I know retirees who manage on partial CPP entitlements, OAS, GIS (guaranteed income supplement) and other benefits e.g. disability credits , providing they qualify. Every plan is not the same!