Old Age Security (OAS) pensions are something that nearly all Canadians count on for their retirement. The maximum monthly payout at age 65 is currently $685.50 and this will increase every quarter in line with increases in the consumer price index for Canada (CPI).
But there are things that you might not know about when it comes to the OAS pension. First, not everyone will receive a full payout – which is reached after 40 years in Canada, after age 18. To be eligible for OAS pension, you need to have resided in Canada for at least 10 years after age 18. If you lived in Canada for between 10 and 40 years after age 18, your OAS pension at age 65 would be reduced proportionately.
For example, say Jeff has lived in Canada for 35 years after 18 and is now turning 65. Jeff would be entitled to an OAS pension at 65 equal to 35/40ths of the maximum. This amounts to $599.81 a month.
Here is where it gets interesting. There is nothing in the rules to say you can’t count years of residence after age 65. To do so, you simply need to postpone the starting date for your OAS pension. Jeff could therefore decide to wait until as late as 70 to get his OAS pension. For each month that he postpones it, the amount payable increases. Just how much it increases depends on which set of two rules is applied.
Under one set of rules, the pension increases by 0.6 per cent for each month after 65 that someone waits to start, up to a maximum of 36 per cent. If Jeff waits until age 70, he would be entitled to get $815.75 a month. (We will call this the “age-adjustment” method of increase.) Jeff would of course also get the regular inflationary increases that would have occurred between ages 65 and 70, but we’ll ignore these for simplicity.
Alternatively, Jeff could continue to accrue residency credits to complete the 40-year residency requirement for a full OAS pension. Since he would reach 40 years in Canada only when he turns 70, it means that he would be entitled to $685.50, plus inflationary increases. (Let’s call this scenario the “residency-adjustment” method of increase.)
Note that the increased payment from the residency adjustment is nowhere nearly as good as the one from the age adjustment. By opting for the latter, Jeff would receive $815.75 at 70 and the residency adjustment would be ignored. Unfortunately for people like Jeff with fewer than 40 years of residency, he gets the benefit of just one of the two methods of increasing his pension, not both. Fortunately for Jeff, the larger amount is automatically given to him.
Is there ever a time when the residency adjustment is better? Yes, if that period is short enough. Let’s assume that Sally has 10 years of residency in Canada by the time she turns 65. She would be entitled to an OAS pension of $171.38 a month starting at age 65 (10/40ths). If she waits until age 70, she would get $257.06 (plus inflation) under the residency adjustment versus $233.07 under the age adjustment.
In theory, one could also apply the residency adjustment to a portion of the deferral period and the age adjustment to the rest of the deferral period. While outside the scope of this article, this could make sense given there is a 20-year residency requirement for receiving OAS pension if one lives outside of Canada after 65.
I have previously recommended postponing the start of OAS pension until age 70, even though the adjustment in pension isn’t as attractive as deferring CPP – where the pension increase is about 42 per cent versus 36 per cent for OAS. Not everyone can afford to wait, though.
The retiree needs to have other sources of income that he or she could draw from until 70 if deferral is going to be seriously considered. Assuming this condition is met, retirees will find deferral appealing if they (a) had less than 40 years of residency in Canada, (b) the residency adjustment gives them more than a 36-per-cent increase at age 70, and (c) they wouldn’t have been eligible for the Guaranteed Income Supplement anyway. Since Sally meets these conditions, she should wait until 70 if she can afford to do so.
Even if the only adjustment to OAS is the regular 36-per-cent increase (the age adjustment), anyone who has been spooked by the recent spike in inflation should seriously consider deferring their OAS pension until age 70. One never knows when inflation will resurface and the best security in retirement is to maximize one’s sources of inflation-protected pension. Like OAS.
Frederick Vettese is former chief actuary of Morneau Shepell and author of Retirement Income for Life.