I have long been an advocate for waiting until 70 to collect Canada Pension Plan (CPP) benefits. Calculations show that most CPP beneficiaries – QPP in Quebec – would be better off in the long run if they wait, largely because of the 42-per-cent bump in the amount payable at 70 versus 65.
Deferring Old Age Security (OAS) pension benefits also increases the payout amount. But does it make sense to wait for those, too?
OAS saw its first permanent increase since 1973 this summer, when Ottawa boosted payments by 10 per cent for those 75 and older. Leading Canadian pension experts Bonnie-Jeanne MacDonald and Doug Chandler were quick to weigh in by strongly recommending retirees defer OAS until 70.
Not everyone agrees with this advice. The main objection concerns what happens if you die before 70. Consider, for instance, if a retiree dies at 68. If she had deferred OAS to 70, she would never have received any OAS pension, and the OAS death benefit is negligible. By deferring OAS, the retiree would be leaving her heirs with a diminished estate if she had been drawing down her RRIF faster than she would if she hadn’t deferred the benefit.
Until recently, I have been ambivalent on the question of deferring OAS pension – but not because of the possibility of dying before 70. The OAS pension at 70 is “only” 36 per cent greater than at 65. By comparison, the bump in CPP at 70 is 42 per cent. If most Canadians weren’t prepared to defer their CPP pensions, I didn’t see the point in trying to persuade them to defer OAS.
But the world has changed. I thought inflation would remain in the range of 1 to 3 per cent over the long term, since that is where it has resided since 1991. I didn’t foresee a pandemic, much less the massive government spending that would fuel the high inflation rate we’ve seen in recent months. Perhaps inflation will return to pre-2020 levels in the near future, but given the propensity of the current federal government to spend so freely, I wouldn’t bet on it.
The Bank of Canada will do its best to lower inflation by raising interest rates, but its efforts may not be enough without some fiscal restraint from Ottawa. To be fair, Canada is far from the only country suffering from high inflation these days.
If you believe that higher inflation is either (a) here to stay or (b) at least more likely to rear its ugly head in the future, then I strongly advise deferring both CPP and OAS pensions: pensions from these programs are fully protected from inflation, something that only the federal government can credibly offer.
There are two caveats, however. The first one is that a death before 70 means there will be less money to distribute to the retiree’s heirs. However, the average 65-year-old male has only a one-in-20 chance of dying before 70; and a one-in-25 chance in the case of women. Prudent decision making involves taking all scenarios into account, not just one unlikely scenario.
The other caveat is that not everyone can afford to defer OAS by five years. You need to have sufficient retirement savings, and the sufficiency threshold is about $400,000 in the case of a 65-year-old couple. If they have less than $400,000 in their RRIF, and they are relying solely on those RRIF assets to generate all their income before 70, they can easily burn through all of it before they start CPP and OAS, especially if investment returns are poor. For a younger couple, the sufficiency threshold needed to defer both OAS and CPP will be even greater.
If you can get past those two hurdles, however, there is usually very little reason not to wait. We should be more afraid of future inflation than of dying at a younger age. The future is uncertain enough as it is without having to throw away a government-provided opportunity to boost your retirement income.
Frederick Vettese is former chief actuary at Morneau Shepell (now Lifeworks) and also the author of Retirement Income for Life.