The Ins and Outs of Old Age Security (OAS)
The Canada Pension Plan (CPP) seems to get all the press these days. There are these debates about whether one should take it as early as age 60, wait until the “normal” retirement age of 65, or even delay the start until as late as 70, given the increasing risk of outliving one’s money, known as “longevity risk,” as life expectancy continues to creep upward.
Old Age Security (OAS) is the government pension that gets short shrift in comparison. You turn 65 and you start getting OAS. That’s it. A decade ago, it was a bigger deal. In the 2012 budget, the Conservative government of the day proposed gradually raising the eligibility age for OAS to 67 from the current age of 65. This was set to begin next year, in 2023. In the 2015 election campaign, the Liberals made reversing the policy a key part of their election platform, which they carried out upon forming government.
To be clear, this is not a post about the economic wisdom of current or past government policies. I follow a few groups that post on a variety of Canadian retirement issues in various social media outlets and a recent discussion about what OAS is and how it is paid inspired this post.
What is OAS?
A Very Brief History
The first old-age pension was established in 1927 and jointly financed by the federal and provincial governments. It was means-tested, required 20 years of residence in Canada, and began at age 70. In 1952, the Old Age Security Act passed in the previous year resulted in a universally available pension available to all Canadians aged 70 and over. This was provided for out of federal revenues and was taxable income. Another act continued a joint federal and provincial means-tested program for those between ages 65 and 69.
In 1966, the Canada/Quebec Pension Plan (CPP/QPP)began followed by the means-tested and tax-free Guaranteed Income Supplement (GIS) in 1967. Various reforms and revisions were proposed in subsequent years, but as of now, OAS continues to be funded through general revenues of the federal government and is universally available beginning at age 65.
Who Qualifies for OAS?
The Residency Requirements
There are legal and residential requirements to receive OAS. The residential requirement begins at age 18. To receive the full OAS, you need to have been deemed a resident of Canada for at least 40 years from the age of 18. If you are a resident of Canada at the time you apply, as long as you have at least 10 years of residency, you will receive partial OAS payments. If you are not a resident of Canada at the time of application, the residency requirement rises to 20 years.
How Much Can You Receive?
In some cases, you will be automatically enrolled to receive OAS beginning the month after you turn 65. Others may have to apply to receive it. You will be notified if you have been automatically enrolled. Assuming you qualify for the full OAS, in the July to September 2022 quarter, you are receiving $666.83 per month, which works out to just over $8,000 per year. However, the amount you receive is adjusted quarterly according to the Consumer Price Index (CPI), so the amount you will have received in a year will be greater than simply multiplying the current monthly payment by 12.
The Boost for 75-Year-Olds
Effective July 2022, seniors aged 75 and over began to receive 10% more than the base amount. That works out to $733.51 per month or just over $8,800 annually.
The Impact of the Residency Requirement
As mentioned above, you need 40 years of residency in Canada to receive the full OAS. For example, let’s suppose that you immigrated to Canada at age 30 and remained a resident of Canada for the rest of your life. If you began CPP at age 65, you would have only 35 years of the required 40 years for the maximum. You would then be receiving 87.5% of the maximum or $583.48 per month (if you are under age 75). If you immigrated to Canada at 55, you would only get 25% of the maximum if you applied at age 65, because you would have residency for only 10 (65 – 55) of the 40 years. However, if you are a Canadian citizen or lawful resident who moved away from Canada at age 28 (you would have 10 years of residency from age 18) and never returned to Canada, you would not qualify for OAS because non-residents of Canada need 20 years of residency.
Delaying Receipt to Enhance Payments
As is the case with CPP, you can delay beginning payments until as long as age 70. Each month delayed past 65 results in an increase in payment of 0.6%. Note, that is different than the 0.7% monthly increase for delays in the CPP. Unlike the CPP, however, you cannot start OAS before age 65.
To illustrate the impact of the delay, let’s suppose you were 65 five years ago. That means you just turned 70. A monthly increase of 0.6% results in a five-year increase of 36%. You would begin receiving OAS at a monthly amount of $906.89 in the current quarter, or nearly $10,900 annualized.
The Dreaded “Clawback”
Formally known as a recovery tax, the clawback is calculated based on the previous year’s OAS payments. The OAS year runs from July to June. This gives the government time to assess your net world income from the previous year’s tax return, specifically the Old Age Security Return of Income Form T1136, and adjust for the next OAS year. At the moment, if you were in a clawback situation based on your 2021 income, you would have noticed a reduction in your July OAS payment.
Let’s use an example for the current year based on the 2021 tax return. If your net world income exceeded $79,845 in 2021, then you would find your payments reduced from July 2022 to June 2023. Let’s suppose your net income was $81,845 in 2021, $2,000 over the threshold. The clawback rate is 15%, meaning that there was effectively an overpayment in the July 2021 to June 2022 year of $300 ($2,000 x 15%). This would reduce the current year’s payments by ($300 ÷ 12) $25 per month. If your net income reached $129,757 in the 2021 tax year, the clawback would have entirely wiped out the OAS that you received.
One thing to observe, however, is that a couple could together theoretically have earned a net income of nearly $160,000 without jeopardizing a nickel of the $16,000 that they got from OAS in 2021.
For 2022, the recovery tax begins at $81,761 and tops out at $134,253 if you are under 75 and $136,920 if you are 75 or older.
What Happens if You are Still Working?
One of the reasons you may wish to defer receiving OAS is precisely because of your income. If you are working past 65 and earning an income that is going to result in the complete recovery of the OAS you would otherwise receive, there’s no point in applying for it. There is, however, no value in delaying past age 70, so even if a substantial portion of your OAS is going to be clawed back, it makes sense to apply for the eventuality of a lower income year.
The Relevance of OAS to the Guaranteed Income Supplement (GIS)
I will close by touching on GIS briefly. Higher-income retirees fret about the OAS clawback, but the benefit of OAS for the low-income earner is that it is not based on income but residency. The OAS benefit is not tied to your contributions as is the case with CPP. Furthermore, although someone with a lower income reading the information above might think it makes sense to delay in order to boost your payments, one thing to realize is that to receive GIS, a tax-free benefit that is income-tested, you must be age 65 or older and receiving OAS. There is also an Allowance and an Allowance for the Survivor for spouses or common-law partners between 60 and 64. You can read more about the GIS here.
This is the 162nd blog post for Russ Writes, first published on 2022-08-29.
If you would like to discuss this or other posts, connect on Facebook, Twitter, LinkedIn, or Instagram.
Click here to contact me for an appointment.
You may be interested in a half-hour no-cost, no-obligation financial planning conversation with me. Click here to sign up for a free session of FinPlan30.
Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.