Walton Financial Group explains the difference between the OAS and the CPP
The OAS (Old Age Security) and the CPP (Canada Pension Plan) are two legs. Get the third leg with a retirement plan from Walton Financial Group in Barrie, Ontario.
How does OAS work? How does CPP work? CPP vs. OAS. Will the money be there when I retire? CPP, OAS and my retirement plans.
Here, at the Walton Financial Group in Barrie, Ontario, we break down the main financial supports from government.
What is OAS and how does it work?
OAS stands for Old Age Security. It’s a monthly payment to any Canadian over the age of 65. In most cases, you’ll be automatically enrolled upon your 65th birthday and don’t even have to apply.
To collect the maximum amount of OAS, you must be a Canadian citizen or permanent resident and have lived in Canada for at least 40 years after the age of 18. If you only resided in Canada for 20 years, for example, then you’re only eligible for partial payouts. If you’re a new immigrant who’s lived in this country for less than 10 years, you’re not eligible at all.
Still, most seniors in Canada will easily qualify for Old Age Security, whether they’ve worked and filed taxes for all these years or not. In 2022, the maximum monthly OAS amount was $685.50 (the average was $666). When the recipient turns 75, that amount is raised by 10 per cent. Every quarter, the payouts are indexed to reflect inflation.
The other, rather massive caveat to OAS is that if you have ample income, say, from investments, a company pension, or withdrawals from your registered retirement savings plan (RRSP), you might earn too much money to qualify for full (or any) OAS benefits. After a certain threshold (in 2022 it’s about $82,000), you’re subject to clawbacks, and if your income is above the ceiling (for the 2022 income year it’s $134,626 for those aged 65 to 74, and $137,331 for those 75 and older), then your OAS will be fully clawed back. The top 15 per cent of seniors won’t get the maximum OAS at all because they make too much money elsewhere. And while you can certainly tinker with how you tap into your savings to minimize clawbacks, do remember this is a very good problem to have.
What is CPP and how does it work?
The Canadian Pension Plan, unlike the (supposedly) universal OAS, is for Canadians who have worked, collected income, and filed taxes in their lifetime in Canada. The CPP is a social insurance program that’s intended to replace employment earnings when someone stops work.
To qualify you must have worked for an income, declared that income, and contributed to the pension plan in advance. The good news is you’ve already done all that without even realizing. Everyone who’s over 18 and has employment earnings already has the benefit simply by filing their taxes.
“The calculation isn’t simple, and it changes year by year based on average salaries,but you can sign into CRA and see exactly how much you’ve contributed in any given year.You won’t contribute anything at all if your net income is below $3,500 and you will stop paying into the program at the tax year’s “maximum pensionable earnings” (in 2022, $64,900). Like we said, the math’s a bit complicated, but you can easily find the exact dollar amount of your contribution to the plan on your annual Notice of Assessment or on your T4 from your employer.
The more you contribute over your working years, the fatter you can expect your monthly CPP cheque to be. Originally, the CPP was meant to replace 25 per cent of someone’s preretirement income, but in 2019, the Liberal government raised contribution rates to correspond with 33 per cent of replaced income post-retirement. But the enhanced contribution rates are being phased in and how much you receive will depend on how much and for how long you made the enhanced contributions. These days, a person who has paid the maximum amount for every year they made the maximum earnings can now retire at 65 with about $1,250 a month from the Canadian Pension Plan, though the average CPP payment in 2022 was just $728. (CPP is indexed to inflation, albeit annually, so you can expect both those numbers to rise.)
What is the difference between CPP and OAS?
The biggest and most important distinction is the basic requirement to qualify: OAS is based on your residency, while CPP is based on your employment history.
The next difference is the age of eligibility. You’ll probably get an OAS payment the month after your 65th birthday but no earlier. CPP, however, has a larger window with wiggle-room for early retirement (as young as 60). Both OAS and CPP can be deferred, and the longer you wait to cash in, the bigger your monthly payouts will be. For this reason, many people defer their CPP benefits to age 70, the latest you can begin to collect.
Another difference is funding. The CPP is already funded while the OAS is not. This means OAS comes from the general tax revenue of the federal government every year, so it can change. Ottawa just introduced a permanent increase to OAS payouts – outside the normal inflation-related bumps – for the first time in decades. A new government, however, could certainly tweak numbers in the other direction were it so inclined.
The CPP, meanwhile, is a big pile of already-collected cash waiting to be tapped into when your time comes. (Well, your cash isn’t quite sitting there, it’s invested.) The more you paid into the pile over the years, the more money you will get back up to the maximum – unlike OAS, CPP isn’t subject to clawbacks, no matter how much money you have put away elsewhere.
How do I know that money will still be there by the time I retire?
If you’re 40 years away from “freedom 65,” it might be hard to imagine what 2062 will possibly look like. The number of years Canadians spend in retirement is dropping.
The uncertainly stems largely from news we consume from our American neighbours. We get a lot of media from the U.S., which tends to scare people into thinking our social security could run out too, but it won’t. All the provinces involved would have to agree before any changes are made to CPP, which never happens.Government can raise contribution rates to keep the plan funded if there is any danger there won’t be enough. And reducing CPP benefits would be political suicide. If anything, they’ll enhance the CPP, so know that that money will be there. We would argue the CPP is the safest possible place for money in Canada.
How should CPP and OAS affect my retirement planning?
Let’s assume you’ve been an absolutely perfect Canadian citizen all these years and will retire with top rates of both CPP (about $1,250) and OAS ($685.50). While $1,900-ish a month is not nothing, it’s probably not enough to live on – and definitely not enough if you plan to travel the world, take up golf or buy a boat. In fact, it works out to just a smidge above the poverty line in Ontario.
Neither the CPP or the OAS is enough to retire on their own and they were never intended to be. Both were designed as one of three legs on a stool: CPP is one leg, OAS is another, and your personal savings and/or private pension plan, if you have one, is the third leg.
The chair metaphor is apt because each “leg” affects and balances the others. For example, when you take money out of an RRSP it becomes taxable income, and you need consider how that works along with your other benefits. To maximize your benefits, you should consider getting professional advice from the Walton Financial Group to decide whether and when to tap into each leg to make a financial retirement plan that you can stick to (and sit comfortably on).
Are there any other government supports available?
Within the OAS, there’s the Guaranteed Income Supplement, which is for people with really low income to help them avoid poverty . The exact numbers change slightly by tax year – but in 2022, a single, widowed or divorced senior with an annual income of less than $20,784 would be eligible to receive a maximum amount of $1,024 a month.
As always, the government will take into account all other assistance and revenue sources and adjust your amounts accordingly, whether that income is from personal funds, like an RRSP, or government assistance, like the CPP. Basically every dollar you receive from another source means you lose 50 cents off the Guaranteed Income Supplement. They’ll also look at your marital situation; if your spouse is also or already collecting the GIS, for example, whatever amount they receive will be considered as well.
OAS and CPP: The bottom line.
Old Age Security (OAS) is a universal benefit from the federal government to anyone over age 65 in Canada – who have lived here for a minimum of 10 years. The Canadian Pension Plan, or CPP (QPP for Quebec workers) is a benefit for working Canadians who paid into the CPP over the years through regular contributions. Contributing to CPP is mandatory in Canada. In 2022, the maximum monthly OAS benefit was $685.50 while the maximum monthly CPP amount was about $1,250. Both benefits can be deferred a few years – the longer you wait, the larger your cheque. OAS and CPP are two of three “legs” onto which you should build your retirement plans; the third leg is personal savings, which could include RRSPs, tax-free savings accounts (TFSAs), non-registered investments, and real estate. Low-income seniors can receive additional support through the Guaranteed Income Supplement. Most experts say you’ll want 60 to 80 per cent of your working income to retire comfortably, but the best amount is whatever makes you not worry.
Call the Walton Financial Group in Barrie, Ontario to set up a meeting with a retirement planning specialist.
