When it comes to retirement benefits in Canada, many retirees wonder: Is the deferral enhancement for Old Age Security (OAS) higher, lower, or the same as the Canada Pension Plan (CPP)? The answer is more complex than it seems, and it depends on critical factors, including your income level and the OAS clawback mechanism. Let’s dive into the details to unpack this intriguing comparison.
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CPP Deferral: The Basics
The CPP offers flexibility in when you start receiving benefits, with options ranging from age 60 to 70. Here’s how it works:
- Before 65: A reduction of 0.6% per month for starting early.
- After 65: An enhancement of 0.7% per month for deferring.
This means a CPP benefit calculated at age 65 can increase by up to 42% if you wait until age 70. If you instead compare the increase from age 60, the boost becomes even more impressive—your CPP at 70 could be over 80% higher than at 60.
OAS Deferral: A Subtle Difference
The OAS deferral enhancement is slightly smaller: 0.6% per month for delaying beyond age 65, resulting in a 36% increase if you wait until age 70. Unlike CPP, OAS doesn’t have an early option starting at age 60.
Here’s where things get interesting. Unlike CPP, the OAS clawback—a reduction in benefits based on income—plays a crucial role in determining the real value of deferral.
The OAS Clawback: A Game-Changer
In 2024, OAS payments start to be reduced if your net income exceeds $90,997. For every dollar above this threshold, 15 cents is clawed back. If your income is high enough, you could lose your entire OAS benefit.
This creates a unique dynamic for those with higher incomes:
- While both early starters and deferrers experience clawbacks, the percentage impact is smaller for those who defer.
- As income rises, the value of deferring OAS to age 70 becomes more pronounced due to the clawback’s diminishing effect on larger payments.
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Real-Life Scenarios: Understanding OAS Deferral Benefits
Example 1: Income Below Clawback Threshold
If your income is $90,997 or less, you’ll receive the full OAS benefit. In this case, the 36% increase for deferring OAS from age 65 to 70 holds true.
Example 2: Net Income of $100,000
At this income level, the clawback reduces OAS payments, but the deferral enhancement becomes 42.7%, surpassing the 42% boost from CPP deferral.
Example 3: Net Income of $125,000
Here, the OAS clawback significantly reduces payments. However, the larger deferred benefit means you still retain 88.2% more if you start OAS at age 70 compared to 65.
Example 4: Net Income of $140,000
At this high income, the impact of deferral becomes striking: deferring to age 70 results in a payment that is 244.8% larger than starting at age 65.
Why the OAS Deferral Is More Valuable Than It Seems
The takeaway? While OAS deferral offers a smaller monthly enhancement than CPP (0.6% vs. 0.7%), the clawback effect can amplify the real value of waiting. For high-income retirees, the deferral enhancement becomes substantially larger when considering the percentage of OAS retained after clawbacks.
Answering the Poll Question
So, is the OAS deferral enhancement higher or lower than CPP?
For many retirees—especially those in the clawback range—the real deferral enhancement for OAS is higher than CPP. The impact depends heavily on your income and whether you prioritize keeping more of your OAS over time.
What This Means for Retirees
The decision to defer OAS or CPP should align with your financial goals, income level, and longevity expectations. But if you’re in a higher income bracket, deferring OAS could unlock significantly greater value than you may have realized.
Are you ready to rethink your retirement strategy?
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