If you’re close to retirement, you no doubt realize that the combination of CPP and OAS provides a cornerstone of your retirement finances.
But this powerful pair of government pensions comes with a timing decision that isn’t always easy to make.
By starting them as early as possible after you retire, you get smaller payouts for a longer period. But if you defer them, you get larger payouts for a shorter period. So which is better?
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As it turns out, the best answer depends on your specific situation. But if you reach the cusp of retirement in good health and have ample savings to draw on, then deferral has some important benefits that are often overlooked. They at least deserve serious consideration.
However, there are several factors that can nudge your decision one way or the other. In what follows, I take you through them one by one.
But first, it’s important to understand the basics of how the Canada Pension Plan and Old Age Security work.
Understanding the impact of your pension timing
While 65 is considered the “standard” age for beginning both CPP and OAS, you can start CPP any time between ages 60 and 70, and OAS between 65 and 70.
Most Canadians who begin their pensions this year at age 65 receive the maximum OAS payout of $8,560 a year for that age (as of April-June 2024), but less than the maximum CPP age-65 pension of $16,375 a year for 2024. The OAS payout is based on length of Canadian residency, whereas CPP payouts are determined by contributions according to a complex formula.
Both pensions are indexed for inflation. (There is also a modest boost to the OAS payout at age 75.)
If you begin CPP earlier than 65, the payout is reduced by 7.2 per cent a year to adjust for receiving more payments over a longer period. If you start CPP or OAS after 65, your payouts are enhanced to compensate you for drawing fewer payments over a shorter time span. The age 65 to 70 enhancement is 8.4 per cent a year for CPP and 7.2 per cent for OAS.
Generally, you shouldn’t start these pensions while you’re still working. That usually results in paying a lot of income tax at a time when you don’t need the money as much as you will later after you retire.
The CPP and OAS timing factors were set years ago and were intended to be “actuarially neutral,” which means they were meant to be financially fair whether started earlier or later, assuming you have average life expectancy.
Many experts, like C.D. Howe Institute senior fellow and retired actuary Malcolm Hamilton, think that the adjustment factors are a bit more favourable to deferral in the current economic environment. That’s especially the case for the CPP deferral factor between 65 and 70 since it’s higher than the others.
But at least you can choose to defer or not defer knowing the deck isn’t stacked against you either way to any dramatic extent.
Now we consider circumstances that might nudge your timing decision in either direction.
Do you expect a long life or not?
First consider whether you have concrete reason to believe you’ll live for shorter or longer than average life expectancy.
If you’re in poor health now, that might encourage you to start pensions early.
It’s hard to predict longer than average life expectancy with reliability.
But if you’re in good health now, have healthy habits, and your forbearers lived long lives, then that should nudge you toward deferral.
Do you have sufficient funds to draw on while you defer pensions?
Next, consider whether you have sufficient savings and other income sources to draw on to replace CPP and OAS payouts during the deferral period without crimping your lifestyle.
Start CPP and OAS early if you don’t have reasonable alternatives.
As Hamilton says: “if you need the money, take the money.”
How do you assess the risks and rewards of each option?
Assessing the potential rewards and risks of each option is personal and should reflect your particular situation and objectives.
But for many people, the prudent thing should be to focus more on protecting yourself from the risk of running low on funds late in life, without worrying as much about leaving money on the table if you die at a relatively young age.
Surveys show that many older Canadians are deeply concerned about the risk of running out of money and the impact of inflation, yet they often don’t make the connection that CPP and OAS deferral are superior ways of providing lifelong protection from those risks, says Bonnie-Jeanne MacDonald, director of financial security research at the National Institute on Ageing (NIA) at Toronto Metropolitan University.
“Deferral is a great way to achieve the financial security that people say they want,” says MacDonald, an actuary and lead author of a series of NIA papers on CPP/QPP deferral that is in the process of being released.
The impact of each strategy also depends on other financial resources you may have. Building up your government pension entitlement through deferral can be a wonderful financial complement for retirees without employer pensions who have ample savings.
On the other hand, if you have a good inflation-indexed employer pension, very limited personal savings, and you have other objectives requiring immediate cash (say you are starting major renovations on your home), then deferring CPP and OAS might not make much sense.
People sometimes worry about whether CPP and OAS payouts will be sustainable, but most experts view those risks as low, particularly for CPP. CPP is funded by contributions and is on track to sustain current benefits for the foreseeable future, according to the chief actuary of Canada’s most recent review in 2022.
OAS is funded out of general federal government revenues and is probably more vulnerable to reduction. But even then, there is nothing in the political winds to suggest any imminent threat, and any future reduction would likely be phased-in at the expense of future beneficiaries rather than those who are already eligible to receive it.
Pension deferral is not for everyone
Deferral is a great way to enhance lifelong financial security in the right situation, but it’s not for everyone.
You should make an informed decision based on your situation — and your objectives.
“It comes back to how people want to live their lives,” says David Field, a certified financial planner with Papyrus Planning. “Some people will be like ‘I want to get the most income out when I can and I will take a bigger risk on the back end.’”
But recognizing that benefits of deferral are often overlooked, Field recommends you go with deferral as the default option unless you find persuasive reasons to start benefits earlier. “Deferral to 70 should be their base case,” says Field. “Not ‘I take CPP at 60 and why should I delay it’. It should be ‘I delay it to 70 and what are my reasons for starting it early.’”
Also, you don’t have to commit to deferring both pensions all the way to 70. You can defer one or both for a year or two and see how it goes. And if you want to defer only one pension, start OAS at 65 and defer CPP, since CPP has the higher deferral factor. (OAS timing decisions are also complicated by the OAS clawback affecting affluent seniors.)
Either way, don’t lose sleep over the decision.
“I think it’s important for people not to worry excessively about this,” says Hamilton. “It’s supposed to be fair (for whatever timing you choose) and it’s close enough to fair. Unless you’re one of those people who obsesses about maxing every last dollar, just decide what you’re going to do and get on with your life.”
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