The Canadian government has just made good on its 2021 budget promise. Starting last week, it permanently increased Old Age Security payments by 10 per cent for seniors age 75 and older, marking the first permanent increase to the OAS pension since 1973. Retiring Canadians can maximize this boost by delaying uptake of their OAS benefits, either by working longer or by using their savings to fund the delay.
Why will the 10-per-cent boost help?
Baby boomers – a quarter of Canada’s population – are moving into a retirement that will look vastly different from that of their parents, especially at older ages.
With increasing longevity and fewer adult children to support them as they get older, more seniors will have to pay for care services as they age, either out of pocket or from the public purse. Strengthening retirement income security for the oldest demographic is a step in the right direction.
Delaying OAS
Most retiring Canadians aren’t aware of it, but they already have a lever to improve their financial security prospects. Seniors aren’t required to take OAS at age 65. They can defer their OAS pension for up to five years, in return for a monthly payment that is increased by 0.6 per cent for each month the pension is deferred – up to a maximum of 36 per cent more, if OAS is claimed at age 70.
Delaying public pensions – and getting more worry-free, inflation-indexed pension income that’s guaranteed for life – is a great financial strategy for improving long-term retirement income security. In fact, when to start taking public pensions such as OAS, Canada and Quebec Pension Plan (CPP/QPP) benefits, is one of the most important financial decisions that Canadians make at retirement.
The boost plus delaying OAS
One side effect of the recent increase to OAS is that it makes delaying retirement benefits even more financially rewarding.
To illustrate the opportunity created by the 10 per cent improvement, let’s take a closer look at the concept of “Lifetime Loss,” introduced in Bonnie-Jeanne’s 2020 National Institute on Ageing research report with FP Canada Research Foundation. Lifetime loss is a straightforward calculation that captures how much money a person can expect to lose by taking their public pension benefits at an earlier rather than a later age.
Up until the 2021 federal budget, an average Canadian could have expected to lose almost $10,000 – in today’s dollars – by taking OAS at age 65 instead of age 70. The additional post-75 10-per-cent boost increases that incentive to wait.
In fact, the post-75 10-per-cent boost means the average Canadian is giving up $13,000 in lifetime income – $9,000 for men and $17,000 for women, in today’s dollars – by not delaying benefits. For Canadians who live longer than average, the actual lifetime loss will be even more.
Putting it into practice: A 65-year-old who takes OAS immediately can expect to receive $666.83 monthly, in today’s dollars for 10 years, to age 75, and can expect to receive $733.51 monthly after that. With a life expectancy of 88.5 years for women, this is a total of $198,849.
The total income for taking OAS at age 70 is $216,021, making the lifetime loss from taking OAS at age 65 as follows: $216,021 (OAS at age 70) minus $198,849 (OAS at age 65), or $17,172.
Not only is a person who is holding on to their savings expecting to lose money, they’re also taking on more risk by forfeiting protection against financial markets, high inflation, living longer than anticipated and the challenges of managing investments late in life.
More reasons to wait
Having greater retirement income security isn’t the only reason to consider postponing your OAS benefits. Here are three more:
- Reducing Guaranteed Income Supplements clawbacks: OAS doesn’t factor into the income test for GIS benefits. Lower-income seniors wishing to avoid GIS income-tested clawbacks may find that using their RRSP savings to defer and boost their OAS benefits has the added advantage of preserving GIS payments after age 70, when withdrawals from their registered retirement income fund would otherwise cut into GIS benefits.
- Better OAS benefits despite clawbacks: At the other end of the spectrum, if you have enough retirement income to fall into the OAS clawback range, the age 75 boost and the 0.6 per cent a month postponement adjustment increase the benefit but not the clawback, leaving payments that would have otherwise not been available.
- Increasing residency requirements: To qualify for an OAS pension, you need to have lived in Canada for at least 10 years after age 18. If you have less than 40 years of residency, you will receive a prorated partial payment based on the number of years of Canadian residency divided by 40. You can benefit from postponing OAS to extend your period of residency (but not beyond age 70).
With the recent experience of high inflation, financial market losses and the vulnerabilities of older seniors highlighted by the pandemic, there are a lot of reasons why delaying OAS is particularly attractive today. When you’re 20 years into retirement, you may have forgotten why you decided to do it – but you’ll almost certainly be happy that you did.
Bonnie-Jeanne MacDonald, PhD, is the director of financial security research at the National Institute on Ageing (NIA) at Toronto Metropolitan University and resident scholar at Eckler Ltd. Doug Chandler is an independent research actuary and Associate Fellow of the NIA. Both are fellows of the Society of Actuaries and fellows of the Canadian Institute of Actuaries.
