When considering retirement benefits in Canada, many wonder: Is the Old Age Security (OAS) deferral increase higher, lower, or the same as the Canada Pension Plan (CPP)? The answer depends on factors like your income level and the OAS clawback. Let’s break it down.
CPP Deferral: How It Works
The CPP gives you flexibility, allowing you to start benefits as early as age 60 or delay until age 70:
- Starting before 65: A reduction of 0.6% per month for every month you start early.
- Starting after 65: An increase of 0.7% per month for each month you defer.
If you delay CPP to age 70, the monthly payment can increase by up to 42% compared to starting at 65. If you compare it to starting at 60, the boost is even greater—your benefit could be over 80% higher at 70.
OAS Deferral: The Difference
OAS works a little differently. You can’t start it early, but delaying it past age 65 gives you a 0.6% monthly increase, resulting in a maximum 36% boost at age 70.
The key distinction lies in the OAS clawback, which can reduce payments for higher-income retirees. This clawback makes deferring OAS potentially more valuable in some cases.
The OAS Clawback: Key to Understanding Value
In 2024, the OAS clawback starts if your net income exceeds $90,997. For every dollar above this threshold, your OAS is reduced by 15 cents. If your income is high enough, the clawback could reduce your benefit to zero.
Here’s the interesting part:
- The clawback percentage is smaller for those who defer OAS because they start with larger payments.
- As your income increases, deferring OAS can retain more value despite the clawback.
Examples: How Income Affects OAS Deferral
Let’s look at how OAS deferral works for different income levels:
1. Income Below $90,997 (No Clawback)
- If your income is below the clawback threshold, you receive the full OAS benefit.
- Deferring OAS from 65 to 70 increases your payments by 36%.
2. Income of $100,000
- Some of your OAS is clawed back, but the deferral boost offsets this.
- The effective increase becomes 42.7%, slightly higher than the 42% for CPP deferral.
3. Income of $125,000
- The clawback reduces your payments significantly.
- Even so, deferring to age 70 retains 88.2% more OAS compared to starting at 65.
4. Income of $140,000
- At this high income, the clawback nearly eliminates payments for those starting at 65.
- Deferring to 70 means you receive 244.8% more than if you started at 65.
Why OAS Deferral Can Be More Valuable
While the monthly OAS deferral increase (0.6%) is smaller than CPP (0.7%), the clawback effect often makes OAS deferral more beneficial for higher-income retirees. Larger deferred payments reduce the clawback’s impact, increasing the real value of waiting.
OAS Deferral Higher or Lower Than CPP?
The answer depends on your income:
- For middle- to high-income retirees, the real value of OAS deferral often surpasses CPP because the clawback has less impact on larger payments.
- For lower-income retirees, CPP deferral offers a higher percentage increase.
What This Means for Retirees
Deciding whether to defer CPP or OAS depends on your financial situation, income, and life expectancy. For high-income retirees, deferring OAS could unlock more long-term value than expected, making it a key part of retirement planning.