CPP and OAS: How the financial supports affect your retirement plans

Open this photo in gallery:

Whether retirement is decades away or just around the corner, like most Canadians you’re thinking ahead, and well prepared with all the funds you’ll ever need. Just kidding! Most of us have far less tucked away than we should, something the government knows and plans for accordingly. But what kind of government help can you expect when you turn 65? And will it be enough to live long and prosper? Here, we break down the main financial supports from government.

What is OAS and how does it work?

OAS stands for Old Age Security and it is both exactly what it seems and also not quite. “OAS is supposed to be a universal benefit given to all seniors in Canada,” explains Bonnie-Jeanne MacDonald, director of financial security research at Toronto Metropolitan University’s National Institute on Ageing. It’s a monthly payment to any Canadian over the age of 65. In most cases, you’ll be automatically enrolled upon your 65th birthday and don’t even have to apply.

Keen readers will notice Ms. MacDonald’s key caveat, “supposed to be.” To collect the maximum amount of OAS, you must be a Canadian citizen or permanent resident and have lived in Canada for at least 40 years after the age of 18. If you only resided in Canada for 20 years, for example, then you’re only eligible for partial payouts. If you’re a new immigrant who’s lived in this country for less than 10 years, you’re not eligible at all. “The only requirement is a simple residency requirement,” explains Ms. MacDonald, “but if you don’t have it – which a lot of people here don’t – that’s a big problem.”

Still, most seniors in Canada will easily qualify for Old Age Security, whether they’ve worked and filed taxes for all these years or not. In 2022, the maximum monthly OAS amount was $685.50 (the average was $666). When the recipient turns 75, that amount is raised by 10 per cent. Every quarter, the payouts are indexed to reflect inflation.

The other, rather massive caveat to OAS is that if you have ample income, say, from investments, a company pension, or withdrawals from your registered retirement savings plan (RRSP), you might earn too much money to qualify for full (or any) OAS benefits. After a certain threshold (in 2022 it’s about $82,000), you’re subject to clawbacks, and if your income is above the ceiling (for the 2022 income year it’s $134,626 for those aged 65 to 74, and $137,331 for those 75 and older), then your OAS will be fully clawed back. “The top 15 per cent of seniors won’t get the maximum OAS at all because they make too much money elsewhere,” says Ms. MacDonald. And while you can certainly tinker with how you tap into your savings to minimize clawbacks, do remember this is a very good problem to have.

What is CPP and how does it work?

The Canadian Pension Plan, unlike the (supposedly) universal OAS, is for Canadians who have worked, collected income, and filed taxes in their lifetime in Canada. (If you work in Quebec you will contribute to something very similar: The Quebec Pension Plan, or QPP.) “The CPP is a social insurance program that’s intended to replace employment earnings when someone stops working,” says pension consultant Doug Runchey at B.C.-based DR Pensions.

To qualify you must have worked for an income, declared that income, and contributed to the pension plan in advance. The good news is you’ve already done all that without even realizing. “Everyone who’s over 18 and has employment earnings already has the benefit simply by filing their taxes,” says Mr. Runchey. (Want to opt out? Too bad: contributing to CPP is mandatory for workers in Canada.)

“The calculation isn’t simple, and it changes year by year based on average salaries,” says Ms. MacDonald, “but you can sign into CRA and see exactly how much you’ve contributed in any given year.” You won’t contribute anything at all if your net income is below $3,500 and you will stop paying into the program at the tax year’s “maximum pensionable earnings” (in 2022, $64,900). Like we said, the math’s a bit complicated, but you can easily find the exact dollar amount of your contribution to the plan on your annual Notice of Assessment or on your T4 from your employer.

Is the CPP/QPP a good deal for both employees and the self-employed?

Speaking of employers, a few little details to clarify: “If you’re a traditional employee, then it’s typical that your employer pays half of your contribution,” says Mr. Runchey. Self-employed people also contribute to CPP – a common question and concern, he notes, and nope, they cannot opt out either – and they technically pay more. “In a self-employed situation, you pay both sides.” To accommodate self-employed people, not to mention people who took parental leave or those who didn’t work for periods of time because of disabilities or other reasons, your lowest seven or eight contribution years (depending on how long you were in the work force) are dropped from your payout calculation so as to not sabotage your overall average income.

The more you contribute over your working years, the fatter you can expect your monthly CPP cheque to be. Originally, the CPP was meant to replace 25 per cent of someone’s preretirement income, but in 2019, the Liberal government raised contribution rates to correspond with 33 per cent of replaced income post-retirement. But the enhanced contribution rates are being phased in and how much you receive will depend on how much and for how long you made the enhanced contributions. These days, a person who has paid the maximum amount for every year they made the maximum earnings can now retire at 65 with about $1,250 a month from the Canadian Pension Plan, though the average CPP payment in 2022 was just $728. (CPP is indexed to inflation, albeit annually, so you can expect both those numbers to rise.)

What is the difference between CPP and OAS?

The biggest and most important distinction is the basic requirement to qualify: “OAS is based on your residency, while CPP is based on your employment history,” says Ms. MacDonald. It’s therefore possible to qualify for one or the other, or neither, or both.

The next difference is the age of eligibility. You’ll probably get an OAS payment the month after your 65th birthday but no earlier. CPP, however, has a larger window with wiggle-room for early retirement (as young as 60). Both OAS and CPP can be deferred, and the longer you wait to cash in, the bigger your monthly payouts will be. For this reason, many people defer their CPP benefits to age 70, the latest you can begin to collect.

Another difference is funding. “The CPP is already funded while the OAS is not,” says Ms. MacDonald. This means OAS comes from the general tax revenue of the federal government every year, so it can change. Ottawa just introduced a permanent increase to OAS payouts – outside the normal inflation-related bumps – for the first time in decades. A new government, however, could certainly tweak numbers in the other direction were it so inclined.

The CPP, meanwhile, is a big pile of already-collected cash waiting to be tapped into when your time comes. (Well, your cash isn’t quite sitting there, it’s invested.) The more you paid into the pile over the years, the more money you will get back up to the maximum – unlike OAS, CPP isn’t subject to clawbacks, no matter how much money you have put away elsewhere.

How do I know that money will still be there by the time I retire?

If you’re 40 years away from “freedom 65,” it might be hard to imagine what 2062 will possibly look like. Ms. MacDonald commonly hears people worrying that the CPP fund will somehow be spent and long gone by the time it’s their turn to access the fund.

The number of years Canadians spend in retirement is dropping

The uncertainly stems largely from news we consume from our American neighbours. “We get a lot of media from the U.S., which tends to scare people into thinking our social security could run out too, but it won’t,” Ms. MacDonald says. “All the provinces involved would have to agree before any changes are made to CPP, which never happens.” Government can raise contribution rates to keep the plan funded if there is any danger there won’t be enough. And reducing CPP benefits would be political suicide. “If anything, they’ll enhance the CPP, so know that that money will be there. I would argue the CPP is the safest possible place for money in Canada,” she says.

How should CPP and OAS affect my retirement planning?

Let’s assume you’ve been an absolutely perfect Canadian citizen all these years and will retire with top rates of both CPP (about $1,250) and OAS ($685.50). While $1,900-ish a month is not nothing, it’s probably not enough to live on – and definitely not enough if you plan to travel the world, take up golf or buy a boat. In fact, it works out to just a smidge above the poverty line in Ontario.

“Neither the CPP or the OAS is enough to retire on their own and they were never intended to be,” says Mr. Runchey. He explains a common retirement metaphor: “Both were designed as one of three legs on a stool: CPP is one leg, OAS is another, and your personal savings and/or private pension plan, if you have one, is the third leg.” (Sometimes finance experts divide the latter into two, so your three-legged stool has four legs, but since only about one in five Canadians has a work place pension, let’s stick with three legs for this money lesson.)

The chair metaphor is apt because each “leg” affects and balances the others. For example, when you take money out of an RRSP it becomes taxable income, says Ms. MacDonald, and you need consider how that works along with your other benefits. To maximize your benefits, you might consider getting professional advice to decide whether and when to tap into each leg to make a financial retirement plan that you can stick to (and sit comfortably on).

Are there any other government supports available?

“Within the OAS, there’s the Guaranteed Income Supplement, which is for people with really low income to help them avoid poverty,” says Ms. MacDonald. The exact numbers change slightly by tax year – but in 2022, a single, widowed or divorced senior with an annual income of less than $20,784 would be eligible to receive a maximum amount of $1,024 a month.

As always, the government will take into account all other assistance and revenue sources and adjust your amounts accordingly, whether that income is from personal funds, like an RRSP, or government assistance, like the CPP. “Basically every dollar you receive from another source means you lose 50 cents off the Guaranteed Income Supplement,” says Ms. MacDonald. They’ll also look at your marital situation; if your spouse is also or already collecting the GIS, for example, whatever amount they receive will be considered as well.

Should I defer my government retirement supports?

This question has no easy answers and entirely depends on a person’s unique situation – and what particular kind of expert you ask. A stockbroker will almost certainly tell you that starting benefits as soon as you can is better – so you can invest the money. Similarly, financial advisers would lose fee revenue if you deplete your retirement account as a bridge to receiving the higher CPP benefit at the age of 70.

But money today is very tempting. “95 per cent of Canadians take their CPP at 65 or earlier,” says Ms. MacDonald. She compares the situation to the classic marshmallow experiment – ask a toddler to choose one marshmallow right now or two in an hour and just guess what they’ll do. Most grownups do no better, but the 5 per cent who choose (and can afford) to wait until age 70 to collect will reap big benefits. Waiting until 70 for CPP equates to 42 per cent more than if you started cashing in at 65. “If you delay collecting your CPP, you’re basically buying more pension,” she says.

Two mistakes people make when calculating when to start CPP based on life expectancy

Of course you could die in the meantime, and so much of the future is uncertain. “There are a lot of unknowns, like inflation and interest rates, that we can guess but we just don’t know,” admits Ms. MacDonald. The pandemic, an unforeseen event, wreaked havoc on inflation rates and altered the usual calculations, but without a crystal ball and second sight, the best anyone can do is focus on what is certain.

“We know that pension plans are being reduced by employers, we know that people are living longer than before, we know the baby boomers – a quarter of the population – are about to retire with a long life expectancy.” If their children risk having to shoulder the burden because parents’ RRSPs run dry at age 85, the way Canadians think about and plan for retirement could change in the very near future.

How do I know that I’ll have enough?

Most experts recommend that your savings and supports – including CPP and OAS, which won’t run out, plus personal savings like RRSPs that will – altogether add up to somewhere between 60 and 80 per cent of your usual preretirement income. “Of course it all depends,” says Mr. Runchey, “but 70 per cent is a common number I hear a lot.”

Whatever your financial means and plans, retirement is a moment of conflicting tensions. On one hand, you could live 30 more years and have to stretch that money out. On the other, you’ve got a big chunk of change, no job and no certainty on how long you will live.

For Ms. MacDonald, the perfect amount is therefore not a number or percentage but a spot where this Catch-22 doesn’t fill you with fear and anxiety. “The best amount is whatever one removes the fear of uncertainty,” she says.

OAS and CPP: The bottom line