Government benefits – When should I take CPP and OAS?

Learning Objectives

• Understand how to determine when you should take your Canada Pension Plan (CPP) retirement and Old Age Security (OAS) benefits 
• Learn about the Guaranteed Income Supplement (GIS) and whether you qualify
• Learn more about how the Common Good Plan can help you be better informed about how government benefits such as CPP, OAS, and GIS can be a part of your retirement income and take action to maximize your benefits

Key Insights

• The Canada Pension Plan (CPP) and Old Age Security (OAS) benefits provide a source of stable, lifelong, inflation-adjusted retirement income starting at age 60 and above
• For modest-income Canadians who qualify, the Guaranteed Income Supplement (GIS) can provide an extra monthly benefit
• Canadians can access CPP as early as age 60 and as late as age 70. For every year before age 65, your CPP benefit is reduced by 7.2%. For every year after age 65, your CPP benefit is increased by 8.4%.
• Canadians can access OAS as early as age 65 and as late as age 70. For each additional year you wait past 65 to take OAS, your annual benefits increase by 7.2%.
• For modest-income Canadians, accessing CPP and OAS earlier can be better
• For middle- and higher-income Canadians, there can be significant benefits to deferring OAS and CPP until age 70.^[1] Yet fewer than one percent of Canadians employ this strategy.^[2]
• The Common Good Plan helps you see how to maximize your government benefits including CPP, OAS, and GIS by showing you how your government benefits can fit into your overall retirement planning.

Determining when it’s optimal to access your retirement income benefits 

Before you turn 60 years old, you may want to decide when to start accessing your government benefits including your Canada Pension Plan and Old Age Security benefits. Your monthly CPP retirement benefit can start as early as age 60 and as late as age 70. Your monthly OAS benefit can be delayed from as early as age 65 and as late as age 70.

It’s important to understand the implications of taking either or both CPP and OAS as soon as you can (age 60 and 65 respectively), compared to taking either or both at a later age, and as late as 70.

For every year before age 65, your CPP benefit is reduced by 7.2%. For every year after age 65, your CPP benefit is increased by 8.4%. In other words, deciding to access your CPP benefits at age 60, compared to at age 65, means that you’re choosing to get 36% less on each CPP benefit cheque. And, deciding to access your CPP benefits at age 70, compared to at age 65, means that you’re choosing to get 42% more on each CPP benefit cheque.

For each additional year you wait past age 65 to take OAS (you can wait as late as age 70), your annual benefits increase by 7.2%. If you choose to access OAS at age 70, you’re choosing to get 36% more on each OAS benefit cheque.

What would be better – getting a lower number of larger-sized benefit cheques by accessing CPP and OAS benefits at age 70, or getting a greater number of smaller-sized benefit cheques by accessing CPP and OAS benefits before age 70?

It depends on your individual circumstance. If you are modest-income, it might be better to take smaller cheques earlier. If you are middle- or higher-income, it might be better to take larger cheques later.

The Common Good Plan can help you see how to factor in your government benefits including CPP, OAS, and GIS by showing you how your government benefits can fit into your overall retirement planning depending on when you decide to access your CPP and OAS benefits.

The advantages of accessing your retirement income benefits earlier –
For modest-income individuals

If you are a modest-income Canadian, you could qualify for GIS, which is an extra monthly benefit for Canadians at and above age 65 with little or no retirement income other than what they get from OAS. In 2020, your income level at and above age 65 would need to meet the following to be able to qualify for GIS (excluding OAS income):

You can apply for GIS when you turn 65. You must meet all of the following criteria[4]:

• Your income is low enough (see above table)
• You qualify for OAS
• You qualify for OAS on the combined OAS/GIS application form

John Stapleton’s guide to retirement planning is a useful resource for modest-income Canadians and includes instructions on how to apply for GIS.

If you will have little or no retirement income other than OAS and qualify for GIS, and you do not receive social assistance (e.g., welfare or disability), you might want to take CPP when you turn 60. You will likely want to start getting some retirement income sooner rather than later since you will have little or no retirement income other than OAS, which starts at age 65. When you turn 65, you will likely get GIS and OAS.[5]

You will be getting smaller CPP cheques than if you wait (recall that for every year before age 65, your CPP benefit is reduced by 7.2% and or every year after age 65, your CPP benefit is increased by 8.4%), but you will likely need some retirement income when you turn 60. Also, CPP reduces your GIS by 50 cents or more per dollar. If you take CPP early, you are getting smaller CPP cheques, so your GIS benefits will be reduced less than if you take CPP later.[6]

If you are receiving social assistance (e.g. Ontario Disability Support), you might want to wait until age 65 to access your CPP benefits, because CPP will reduce your social assistance money.[7]

You can still work and continue to contribute to your CPP between ages 60 and 65. Contributing to your CPP while working results in an additional post-retirement benefit and will increase your future retirement income. If you want to stop paying into your CPP, you can opt to do so at age 65. Your contributions to your CPP will stop at age 70 even if you are still working.

The advantages of accessing your retirement income benefits later –
For middle- and higher-income individuals

If your expected income level at and above age 65 is higher than the thresholds set for GIS, you might want to delay taking your CPP and OAS benefits – you likely don’t need the extra retirement income from CPP as soon as you turn 60. Some experts have estimated that generally if you live until at least age 82, delaying access to CPP until age 70 is better.[8] Yet less than one percent of Canadians employ this strategy.[9] Of course, if you know that you have a shorter life expectancy than 82, then accessing CPP before age 70 may be better.

In order to plan conservatively for retirement, you may want to plan for a longer lifespan than your average life expectancy by delaying “turning on” either or both CPP and OAS benefits until you are closer to age 70 and save more through your Common Good Plan and/or through other retirement savings plans so you don’t have to rely on CPP and OAS benefits until you’re 70 years old.

Delaying your access to CPP and OAS benefits until later can also help increase protection against the risk of outliving your other retirement savings, because CPP and OAS benefits last as long as you live, as well as protect against inflation risk, because CPP and OAS benefits are indexed to inflation.

References

[1] A number of well-known financial commentators have recommended a CPP and OAS deferral strategy. See, for example, Fred Vettese, “Why You Should Wait to Age 70 to Start to Collect CPP Benefits,” Financial Post (Aug 16, 2016); Jonathan Chevreau, “The Secret to Paying Less Tax in Retirement,” Globe and Mail (Aug 31, 2017).

[2] Fred Vettese, “Why You Should Wait to Age 70 to Start to Collect CPP Benefits,” Financial Post (Aug 16, 2016).

[3] The Allowance is a benefit available to modest-income individuals aged 60 to 64 who are the spouse or common-law partner of a Guaranteed Income Supplement (GIS) recipient. https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/guaranteed-income-supplement/allowance.html

[4] John Stapleton, “Low Income Retirement Planning” (2020)

[5] John Stapleton, “Low Income Retirement Planning” (2020)

[6] John Stapleton, “Low Income Retirement Planning” (2020)

[7] John Stapleton, “Low Income Retirement Planning” (2020)

[8] John Heinz, “Your Canada Pension Plan questions answered,” The Globe and Mail (Sep 27, 2019).

[9] Fred Vettese, “Why You Should Wait to Age 70 to Start to Collect CPP Benefits,” Financial Post (Aug 16, 2016).