My latest MoneySense Retired Money column looks at a rare 10% boost of Old Age Security (OAS benefits) Ottawa recently confirmed for seniors aged 75. As you’ll see there are plenty of implications and points to consider for those who are younger and contemplating deferring OAS to 70, or indeed CPP.
You can find the full column by clicking on the highlighted headline here: Delaying CPP and OAS — Is it worth the Wait?
The National Institute for Aging (NIA) confirmed OAS payments for Canadians aged 75 or older will be hiked 10%: the first permanent increase in almost 50 years. The NIA’s Director of Financial Security Research, Bonnie-Jeanne MacDonald, and Associate Fellow Doug Chandler said in the release the best way for retirees to maximize this boost is to defer OAS benefits for as long as possible, either by working longer or by using their savings to fund the delay.
By now, most retirees are aware they can boost Canada Pension Plan (CPP) benefits by 42% by delaying the onset of benefits from age 65 to 70, or 0.7% for each month of deferral after 65. What’s less well known is that a similar mechanism works for OAS. Unlike CPP, OAS is never available before age 65, but by delaying OAS benefits for 5 years to age 70, you can boost final payments by 36%, or 0.6% more for each month you delay benefits after 65, according to the NIA. Before the August increase at age 75, the NIA said average Canadians would “leave on the table” $10,000; but after factoring in the new increase, they would now lose out on $13,000 by taking OAS at 65.
MacDonald and Chandler noted there are three other reasons to postpone OAS benefits: Reduced clawbacks of the Guaranteed Income Supplement (GIS) after age 70; Better OAS benefits despite clawbacks for those with more retirement income: and Increasing residency requirements. On point one, it says lower-income seniors wishing to avoid GIS income-tested clawbacks could draw down on RRSP savings to defer and boost OAS benefits, thereby preserving GIS payments after 70. On point 2, those subject to OAS clawbacks may find the age 75 boost in combination with delaying benefits may increase benefits but not the clawback. And on point 3, waiting may mean more years of residency for those who have not lived their entire years in Canada: to qualify for OAS you need to have been a Canadian resident for at least 10 years after age 18, so the five extra years of waiting for benefits could add to the payout.
However, on the first point retired actuary and retirement expert Malcolm Hamilton says it’s true deferring OAS until 70 and drawing more from your RRIF to compensate, means your RRIF income after 70 will be smaller and OAS pension larger. “However, by not drawing OAS until 70, low-income seniors will forfeit the full GIS benefit before 70. This doesn’t look like a good plan to me.”
If you can’t afford to defer benefits, don’t do it
Hamilton adds that as a rule, “if you cannot easily afford to defer your OAS/GIS benefits, don’t do it. If you can afford to defer but your health is not good (i.e. there is reason to believe that you will not live into your 80s) don’t defer your benefits.” And third, “if you are affluent and healthy, defer your CPP/OAS pensions for as long as you can if real interest rates are low (as they have been since 2010) and draw your pensions at 65 or earlier if real interest rates are high (like they were in the 1980s and 1990s).”
The column also includes input from noted author and finance professor Moshe Milevsky, who agrees with the thrust of the NIA’s analysis. “As Professor Larry Kotlikoff https://kotlikoff.net/ has been saying for decades: delay, delay, delay. And this economic idea is being imported to Canada.”
Why most Canadians don’t always defer benefits
However, Milevsky wonders why most Canadians don’t actually follow this advice in practice: “And, why aren’t financial advisors (or advisers) more vocal in advocating delay?” He points to the familiar dynamic that many in the financial industry benefit from more-versus-less assets under management. “There is an inherent conflict of interest there that nobody talks about. They don’t want you to decumulate financial wealth too fast.”
Second, there is a deep fear that governments constantly change rules and tax rates, and that eventually the “wealthy” in Canada will be asked to pay more income tax: “So, those larger delayed CPP/OAS payments might be taxed more onerously. The idea here is to take less income starting now, just in case the rules change later. It’s credit risk in action.”
Third, Milevsky says, Canadians with under-average health might want to think very carefully about delaying their CPP/OAS life annuities, and 50% of people are in that category.