How inflation affects OAS timing

As with CPP, old-age security (OAS) recipients should carefully consider when to start receiving benefits. While many Canadians don’t have the luxury of being able to defer their payments, those with the financial means must now factor inflation into their decision.

OAS is Canada’s largest federal program, with benefits indexed each quarter. On July 1, 2022, those 75 and older saw a 10% permanent increase to their monthly benefits.

As of Jan. 1, 2023, the OAS maximums are:

• Age 65 to 74: $ 687.56
• 75 and older: $756.32

The OAS amount a Canadian citizen or legal resident receives depends on how long they’ve been a resident of Canada after age 18, with 10 years the minimum to qualify. Someone who’s lived in Canada for fewer than 40 years (after age 18) would receive a partial payment based on the number of years in Canada divided by 40. (There are special rules for those working outside Canada for Canadian employers.)

OAS benefits are available at age 65 but may be deferred to 70. The enhancement for delaying the start date past 65 is less generous than that for the CPP: 0.6% per month rather than 0.7% per month for CPP.

Table 1: Age-based enhancement to OAS

OAS starting age	Enhancement at 0.6% per month
65	0.0%
66	7.2%
67	14.4%
68	21.6%
69	28.8%
70	36.0%

The quarterly inflation adjustment for all OAS benefits (including the guaranteed income supplement) is based on the difference between the average CPI for two periods of three months each:

• the most recent three-month period for which CPI is available, and
• the last three-month period where a CPI increase led to an increase in OAS benefit amounts.

The payments starting in the first quarter of 2023 were indexed by 0.3%, bringing the total increase for the year to 7.0%.

The decision on when to begin taking OAS involves factors such as employment and other income, life expectancy and inflation. We’ll use three case studies to examine the choice.

If only Sam had known

Sam, 70, met the qualifications for automatic OAS enrolment: he had a Canadian address, had participated in the CPP for 40 years or more, and had been approved for CPP. Service Canada advised him that his OAS payments would start in December 2017, the month after he turned 65. Unfortunately, Sam didn’t know he could defer his OAS. In December 2017, he automatically received his first payment of $585.49. He continued to work and most of his OAS was clawed back.

Had Sam deferred his OAS for the maximum five-year period, he could have received $932.28 (the maximum of $685.50 for the fourth quarter of 2022, increased by 36%) as his first payment. Since he’s now retired and no longer receiving employment income, there would have been no clawback. And Sam would have been paid this higher amount, adjusted each quarter for inflation, for life.

Understandably, he’s unhappy that he hadn’t given due consideration to the deferral option.

Not only is there an enhancement for each month of OAS delay — it’s the inflation-adjusted amount that’s enhanced, making the amount received at the later date even larger. Had Sam deferred his start for the maximum period, his initial payment would have been 59.3% larger: $932.28 versus $585.49.

Canadians have been able to defer their OAS since 2013. Surprisingly few do so: only 4% of the first cohort, according to CRA data for the 2014 to 2018 taxation years. The average length of deferral was 23 months. One-third deferred for one year or less, and more than 60% for two years or less. Only 20% deferred for two to three years, while the remainder deferred for more than three years.

As expected, most of those who deferred had — like Sam — either continued to work or had high incomes.

Unfortunately, many retirees underestimate their life expectancies in determining when to start OAS (and CPP/QPP) benefits. The CPP’s most recent actuarial valuation estimated the average life expectancy for a man born in 2019 is 80.0 and 84.6 for a woman.

According to the 2014 Canadian Pensioners’ Mortality Table, a man who lives to 65 has a 50% probability of reaching 89, a 25% probability of living to 94 and a 10% probability of celebrating his 97^th birthday. For women, the equivalent ages are 91, 96 and 100. (Note that members of pension plans generally outlive the broader population.)

Another case study shows the value of deferring OAS.

Karl’s patience pays off

Karl is retired and quickly approaching his 65^th birthday. He is debating whether to start OAS at 65 (January 2023) or to defer until he’s 70. Karl has met the 40-year requirement and therefore is entitled to maximum OAS.

He is also aware that the government will increase his OAS benefits by 10% at 75. If he delays his OAS, the 10% increase is based on both the enhancement and inflationary increases.

Someone receiving the maximum OAS in 2022 would have received approximately $7,929. This works out to an average monthly OAS benefit for the year of approximately $660. We will assume that monthly average OAS payments will increase by 5% for 2023, and thereafter by the Bank of Canada’s 2% target inflation rate.

Table 2: Karl’s average monthly OAS (2% CPI)

Year	Age on Jan. 1	Annual pension starting at 65	Amount at deferred age	Increase in pension
2023	65	$687.25
2024	66	$701.00	$751.47	9.34%
2025	67	$715.01	$817.98	19.02%
2026	68	$729.32	$886.85	29.04%
2027	69	$743.90	$958.15	39.42%
2028	70	$758.78	$1,031.94	50.15%

We can see in Table 2 that the growth in Karl’s pension is especially dramatic if he defers the start date to age 70.

It is also important to consider the cumulative amounts Karl would receive at different start dates. As we see in Table 3 below, if he defers OAS benefits from age 65 to 70, the breakeven point is in his 80^th year — well before Karl reaches his life expectancy. (We aren’t counting notional after-tax interest earned on the OAS benefits that Karl would have otherwise received.)

Table 3: Cumulative OAS pension at end of year

Age on Jan. 1	Start OAS at 65	Start OAS at 70
65	$8,247
70	$52,323	$12,383
75	$105,078	$83,641
80	$170,090	$171,455
85	$241,869	$268,408
90	$321,118	$375,453
95	$408,616	$493,639
100	$505,221	$624,125

Another important consideration is the OAS clawback. Unlike the CPP benefit, OAS benefits are income-tested and subject to a gradual clawback: $0.15 for every dollar of income above the threshold — $86,912 in 2023. (Also note that while the CPP provides for survivor benefits, the OAS does not.)

If a 65-year old’s benefits commenced in January 2023, they would receive an estimated $8,247 in OAS payments. However, if their income for 2023 exceeds $86,912, they would enter the clawback zone. At an estimated $141,917, all of the OAS benefits would be clawed back. In this scenario it would make sense to start OAS benefits in a later year: Why start them only to have to them clawed back?

With the 0.6% per month increase for deferring OAS, the income ceiling for the clawback zone increases at more than just the rate of inflation. Deferring OAS may allow clients to retain more of their benefits in future years.

Sam vs. the clawback

Let’s go back to the first case study and do a rough estimate of how much higher Sam’s ceiling for the clawback would have been if he’d had the higher pension for a 12-month period. We can estimate this as:

Sam’s annualized pension ($932.28 – $685.50) x12	$2,961.36
Clawback rate per $ of additional income	$0.15
Increase to upper limit of clawback zone ($2,961.36/0.15)	$19,742

Remember that the clawback zone for those 75 and older is higher, as it takes into consideration the 10% increase in benefits. For 2022, up to an additional $405.70 would have been received in the July-December period for those who had not deferred their OAS. This pushes up the ceiling of the clawback zone by $2,705 to $137,331. For a full year it would be twice that, and even larger for those who had deferred their OAS.

OAS regrets and cancellation

Let’s use one more case study to examine the rules around cancelling OAS payments.

Amanda applied for OAS in the summer of 2022 assuming her income would be low enough to avoid clawback. However, she received a surprise year-end bonus.

Because Amanda had been receiving OAS benefits for less than six months, she can write to Service Canada and request that her payments be cancelled. She has to repay the amounts and is able to defer the start date to potentially preserve full access to OAS as well as benefit from the increased benefit payment arising from the deferral.

Conclusion

As with CPP, considerable care must be taken in determining the appropriate start date for OAS benefits. Some high-income clients will always have their OAS fully clawed back. However, for others, planning can mitigate the clawback effect.

For many, CPP and OAS are the only source of “lifetime income,” and taking advantage of the increased benefits by deferring may be the best course of action.

Too many Canadians draw these benefits earlier than is optimal, assuming a normal life expectancy. It’s worth asking whether the introduction of automatic enrolment led more individuals and their advisors to forego the appropriate analysis.

Lea Koiv , CPA, CMA, CA, CFP, TEP, is a tax, pension and retirement expert who has held senior roles at a national insurer and international accounting firms. Reach her at info@leakoivassociates.ca.