OAS – Old Age Security

Public pensions for seniors based on residency in Canada

Old Age Security is the largest pension plan run by the Government of Canada, paid to over six million people. Eligibility is based on age and years of Canadian residency, and while not directly based on income, benefits are reduced over a certain income level.

No-one pays directly into OAS. Rather, pension recipients are paid out of current tax revenue, making it one of the government’s largest costs at over $50 billion annually.

In 2022, the government announced a permanent 10% increase to the OAS pension beginning in the month of a pensioner’s 75th birthday. This 10% increase does not affect the calculation of a pensioner’s Guaranteed Income Supplement (GIS).

Who is eligible to receive OAS?

You must be at least age 65 to receive an OAS pension, and:

- If applying as a current Canadian resident, you must be either a Canadian citizen or legal resident, and have resided in Canada for at least 10 years since the age of 18.
- If applying from outside Canada, you must have been a Canadian citizen or legal resident the day before you left, and must have resided in Canada for at least 20 years since the age of 18.

Amount of the OAS pension – Taxable

The OAS pension is paid monthly, with amounts indexed each calendar quarter.

- For the third quarter of 2024, the full benefit is:
  - $718 monthly, which annualizes to about $8,620, for those age 65 to 74, or
  - $790 monthly, which annualizes to about $9,482, for those age 75 and over.

- The full pension is for those who have resided in Canada for at least 40 years after age 18. A reduction may apply if the person was not continuously in Canada for the 10 years preceding pension approval.
- A partial pension at the rate of 1/40^th per year of residence after age 18 is available if the person resided in Canada for at least 10 years after age 18.

Application process and timeline

Canadian residents who have paid into the Canada Pension Plan receive a letter from Service Canada the month after turning age 64, advising that they are automatically enrolled for OAS the month after turning 65.

Otherwise, a person should apply to Service Canada, in paper or online, at least six months prior to the intended start month. Someone who has already reached age 65 may apply and receive up to 11 months of retroactive payments, with the first retroactive month as the start age for the continuing OAS pension.

Deferring OAS up to age 70, with a premium

A qualified individual may defer commencement of the OAS beyond age 65, up to age 70. The monthly pension is increased 0.6% for every month taken after age 65, rising as much as 36% if one waits to age 70.

- For the third quarter of 2024, that could increase the pension to as much as:
  - $977 monthly ($11,636 annual equivalent) for those up to age 74, or
  - $1,074 monthly ($12,893 annual equivalent) for those age 75 and over.

Old Age Security pension recovery tax – The clawback

For each dollar of income over an indexed annual threshold, there is a 15% OAS recovery tax – or clawback. The clawback is based on net income in a reference calendar year, applied in the OAS program year following the tax reporting due date of that reference year, generally April 30^th following the respective year-end.

Related benefits – Income-tested and non-taxable

Guaranteed income supplement (GIS)

The GIS is a monthly benefit added to the OAS pension of a low-income pensioner resident in Canada.

Spouse’s Allowance

If you are 60 to 64 years of age and your spouse or common-law partner is receiving the OAS pension and is eligible for the GIS, you may be eligible to receive this benefit.

Allowance for the Survivor

If you are 60 to 64 years of age and widowed, you may be eligible to receive this benefit.

CPP – Canada Pension Plan

Public pensions for retired & disabled workers

CPP is a social insurance plan providing income replacement to contributors and their families in the event of retirement, disability or death. It is government-run, but funded by mandatory employee and employer premiums. Premiums are invested by CPP Investments, a body independent of government politics or CPP administration. While CPP is the largest long-term disability plan in Canada, serving both contributors and dependents, the largest component of CPP payments is the retirement pension.

Guiding principles

Historically, CPP was designed to replace 1/4 of a worker’s average earnings, up to the year’s maximum pensionable earnings (YMPE), an annually-indexed dollar ceiling approximating the average national wage. In 2016, enhancements were introduced to eventually move the replacement target to 1/3 of qualifying earnings.

- The first phase of the enhancements began in 2019 with the premium rate moving from 4.95% in roughy equal annual increments through to its target 5.95% level in 2023.
- Phase two began in 2024, with a 4% premium being levied on income above the YMPE up to the year’s additional maximum pensionable earnings (YAMPE). The YAMPE is set at 7% above the YMPE in 2024, then rises to 14% above YMPE for 2025 and thereafter.

Premium payments

Employers withhold employee premiums in their payroll process, adding an equal amount as its own premium, and remitting the total to the Canada Revenue Agency. Employers claim a deduction for their premiums. Comparatively, employees claim a tax credit for premiums on income up to the YMPE, and a deduction for the additional premium up the YAMPE. Self-employed individuals pay both the employee and employer portions.

For 2024 the employee premium rate of 5.95% applies above the $3,500 exempt income level up to the YMPE of $68,500, for a maximum premium cost of $3,868. The 4% for the addition applies from the YMPE up to the YAMPE for 2024 of $73,200 (a range of $4,700), for a potential maximum additional premium of $188.

The connection between premiums paid and your potential retirement pension

Contributors earn credits for premiums paid during working years, from age 18 until the age when the pension begins. In concept, credits are spread across the number of working years to arrive at an average.
In practice, there are adjustments for presumed and actual absences from work, mainly:

General dropout

Takes out the equivalent of up to eight years, to acknowledge schooling, unemployment or other reasons

Child rearing provision

For actual time away from the workforce spent caring for children up to age seven

Disability exclusion

Periods during which a person is disabled, per CPP definitions

Over-65 dropout

May replace relatively low earnings before age 65 with higher earnings after age 65

Your actual retirement pension depends on the age when you begin

For 2024, the maximum annual pension is $16,375 at age 65. Age 65 is what CPP considers to be the standard age, but it’s not a legal requirement. A retirement pension may begin as early as age 60 or as late as age 70:

- The pension is reduced 0.6% for every month taken before age 65, which is a 36% reduction at age 60. For 2024, this works out to a maximum of $10,480.
- The pension is increased 0.7% for every month taken after age 65, which is a 42% increase at age 70. For 2024, this works out to a maximum of $23,252.

Complementary components of the CPP, outside of the core retirement pension

Disability pension

Unable to work at any job on a regular basis due to severe & prolonged disability

Survivor’s pension

Spouse or common-law partner of a deceased CPP contributor

Children’s benefit

Dependent of a disabled/deceased contributor, to age 18, or age 25 if full-time student

Post-retirement benefit

Augments pension of CPP retiree who continues to work and pay premiums

Post-retirement disability benefit

When a disability arises after starting retirement pension

Death benefit

A one-time $2,500 payment to the estate or dependent of a deceased CPP contributor

A sea change for the CPP

More benefits and premiums on the horizon

It may seem to some people that the Canada Pension Plan (CPP) is constantly changing, as it has regularly been in the headlines since the 2008–09 economic downturn. The truth is the CPP goes through incremental indexing every year, while wholesale revisions are uncommon.

But with the recent change in political leadership in a number of provinces and at the federal level, the most significant changes to the CPP since the 1990s have gone from talk to action.

On June 20, 2016, Ottawa and the provinces reached agreement in principle to enhance the CPP. First reading of Bill C-26, which contains the proposed CPP enhancements, was on October 26. At the time of writing, the bill continues to work its way through Parliament, having passed second reading on November 17 and been reported back without amendment from the Finance Committee on November 24.

Here’s what to expect as we transition into this new normal.

Why increase the CPP?

Research commissioned and analyzed by the Federal Department of Finance points to a concern about both current and projected future under-saving for retirement.

Based on Statistics Canada’s Survey of Financial Security 2012, it is estimated that 24% of families nearing retirement age are at risk of not having adequate income in retirement to maintain their standards of living.

At the other end of the age spectrum, young workers face longer life expectancy, which in turn requires more conscientious long-term savings. With workplace pensions becoming rarer and those already established shifting away from defined benefits, the pressure on individual savings is accentuated. Add to that the current (and potentially prolonged) low-interest-rate environment, and a perfect storm may lie ahead for many working Canadians seeking the safe harbour of a comfortable retirement.

The components of change

The CPP is structured as an insurance arrangement where premiums during working years fund pensions in retirement.

The retirement pension is calculated as a replacement percentage of a target income level. Accordingly, there are two large levers that can be used to increase pensions: adjust the replacement percentage or the target income level. These changes will effectively do both:

The income replacement level will increase from 1/4 to 1/3 of eligible earnings
The upper earnings limit will be increased by 14%

Of course, hikes to employer and employee premiums will be required to pay for those increases.

Timelines, and projecting the dollars and sense of it

The plan is to have all changes in place by 2025, with the seven-year transition to begin in 2019. It will occur in two phases.

For the five-year period from 2019 to 2023, the rate of contributions based on the existing year’s maximum pensionable earnings (YMPE) will be raised each year. Currently, employers and employees each contribute 4.95% of the YMPE. By 2023, that will be 5.95% each, based on the following implementation schedule:

Table: Upcoming CPP premium increases

Year / Cumulative addition

2019 0.15%
2020 0.30%
2021 0.50%
2022 0.75%
2023 1.00%

The second phase of the transition will be the augmentation to the earnings limit. The YMPE will continue as a concept, and a new concept will be introduced to track the upper earnings limit: the year’s additional maximum pensionable earnings (YAMPE). The YAMPE will begin as 107% of the YMPE in 2024 and move to 114% of it in 2025, after which the two thresholds will be separately indexed, though using the same standard indexation factor.

The Office of the Chief Actuary projects the YMPE (currently $55,300 for 2017) will rise to $72,500 by 2025, putting the YAMPE at $82,700 (in round terms). On the enhanced portion between the YMPE and YAMPE, the premiums are expected to be 4% each for employers and employees.

Some offsetting relief

To recognize the difficulty low-income individuals may have in budgeting for higher premiums, the working income tax benefit (WITB) is being raised. The WITB is a refundable tax credit that is reduced to zero at an income of $18,292 for unattached individuals and $28,209 for couples with children, in current-dollar values. The value of the WITB will be increased to roughly offset the incremental CPP premiums.

At the upper income end, those employees required to pay premiums on the enhanced portion of the CPP (the range between the YMPE and YAMPE) will be entitled to claim a tax deduction for this amount. The prevailing tax-credit structure will continue to apply to existing employee premiums based on the YMPE. As the tax credit is at the lowest-bracket rate, a tax deduction is more valuable as an employee’s income increases. This has the added effect that, should an employee reduce registered retirement savings plan or pension contributions (both being deductible amounts) in response to the increased premium on the CPP enhancements, there would be no increase in that person’s current taxes.