The differences between CPP and OAS

Old Age Security (OAS) and Canada Pension Plan (CPP) are hot topics because of all the attention on pension reform

From the questions I get, I realize many people are confused about the different government benefits so this article attempts to help people understand the differences between CPP and OAS.

CPP is not really a government benefit

One of the big differences between CPP and OAS is that the government does not fund CPP.  CPP is really a defined benefit pension plan, which is not part of government assets.  Canadians and their employers make contributions into CPP through their paycheques.

OAS on the other hand is a government benefit.  If you look at your paystubs, there is no OAS deduction.  Instead the income tax that Canadians pay go into a generally pot which goes to fund various programs, one of which is Old Age Security.

Will CPP and OAS run out of money?

Despite a common fear that CPP will run out, the CPP Investment board suggests that CPP is on solid ground because contributions into CPP have been steadily increasing and the plan continues to grow it’s reserves.  In fact new CPP changes came into effect in 2012 to provide greater flexibility for older workers to combine pension and work income if they wish; modestly expand pension coverage; and improve fairness in the Plan’s flexible retirement provisions.  All these changes are affordable under current funding levels.

Old Age Security is very different because there is no fund and there is no surplus.  OAS payments are paid by current taxpayers.  With all the baby boomers turning 65 over the next 20 years, the government is very concerned about the rising cost to fund OAS.  According to government reports, OAS is costing the government $36.5 billion dollars.  They predict that the cost to fund Old Age Security will triple to $108 billion by 2030.  Between CPP and OAS, OAS is more likely to be at risk of change.

Clawback

One of the questions I commonly get is whether CPP or OAS has a clawback provision. There is no clawback of CPP.  Clawback only applies to Old Age Security.  The OAS clawback means that high-income earners (over the age of 65) are required to repay some or the entire OAS pension.  If your net individual income is above a set threshold, your OAS pension will be reduced. Here are the starting thresholds:

  • $70,954 for 2013
  • $69,562 for 2012
  • $67,668 for 2011
  • $66,733 for 2010
  • $66,335 for 2009

As you can see, OAS is adjusted each year for inflation.

Age of eligibility

Canada Pension Plan is a benefit that defines ‘normal retirement’ as age 65.  You can take early CPP as early as age 60 but at a reduced rate.  You can also choose to collect CPP after 65 as late as age 70 at an enhanced amount.  There is some flexibility in when to draw CPP and there are mathematical breakeven points to consider.  Here’s a couple of article on on taking CPP early:

Old Age Security is a benefit available at age 65.  You cannot collect OAS any early and new rules now allow for the voluntary deferral of OAS to as late as age 70.

One of the speculations from the Harper government is the change of eligibility of OAS from 65 to 67.  There has been some confusion and many people have mistaken this change to apply to CPP.

This is not the first time in OAS history that the government has tried to make changes to OAS. In 1985, Brian Mulroney tried to stop fully indexing OAS benefits to inflation.  In 1996, the Chretien government tried to replace the OAS program with a confusing and inferior Seniors Benefit.  In both cases, there was enough lobbying and backlash that the government backed off and left OAS alone.

Benefit amounts

The amount of Canada Pension Plan you will get in retirement is based on contributions into the plan.  The more you contribute, the more CPP you will be eligible for at retirement.  Here are the maximum benefits at age 65:

  • 2013 – $1012.50 per month
  • 2012 – $986.67 per month
  • 2011 – $960.00 per month
  • 2010 – $934.17 per month
  • 2009 – $908.75 per month
  • 2008 – $884.50 per month
  • 2007 – $863.75 per month
  • 2000 – $762.92 per month

Old Age Security benefits have nothing to do with how much you worked, how much income you made or how much tax you paid.  OAS is based solely on residency.  If you were resident of Canada for 40 years between the age of 18 and 65, you will get the maximum OAS amount.  Here are the maximum OAS figures:

  • 2013 – $546.07 per month
  • 2012 – $540.12 per month
  • 2011 – $524.23 per month
  • 2010 – $521.62 per month
  • 2009 – $516.96 per month

Survivorship

When someone dies, the Canada Pension Plan can continue to a spouse through a CPP Survivor Pension.  The surviving spouse must apply (it is not automatic) and the maximum combined CPP pension (personal CPP plus CPP survivor) cannot exceed the annual maximum benefit.

There are no provisions for OAS to continue to any after death.  OAS ends when the pensioner dies.

Splitting income

Couples can split their CPP retirement benefits. The only reason you would do this is if the spouse with the higher CPP is in a higher tax bracket than the lower CPP earner. Both spouses must be over the age of 60 and both have applied to collect CPP. CPP is a two directional split which means both spouses must split their CPP. For example, if the higher income spouse earns $700 per month and the other spouse earns $300 per month, CPP allows each spouse to take $500 per month ($700 plus $300 divided by 2).

There is no provision with OAS to split income.

My Two Cents

As you can see, Canada Pension Plan and Old Age Security are very different benefits.  Either way, its important to understand the benefits to see the role they will play in your retirement income plan.  Did I miss any differences?  Feel free to add in your two cents below.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

17 Responses to The differences between CPP and OAS

  1. Great post. I don’t think you missed anything, but I would also add that although the current CPP maximum payment is $986.67 the average is much less at only $512.64. Might be a bit misleading for someone to glance at those numbers and jump to the conclusion they’ll be getting $986/month from CPP when, on average, they’ll only get about half that. Of course, the actual amount anyone gets is determined on what they’ve paid in over the years, as you’ve indicated. OAS average and max are much closer, I guess meaning most people getting OAS did live here for at least 40 years between 18 and 65. We’re a loyal bunch… !! Cheers,

    MC

  2. Good job in distinguishing the two.

    ith the recent media blitz of the possibility of delaying OAS to age 67 – so many people are upset, with fears that they’ll never be able to retire! What they don’t realize is that OAS and CPP are not the same thing. They can still collect CPP at 65, and between CPP, company pensions and RRSPs… these folks should still be able to retire.

  3. Comment, the term clawback is a bit misleading -what really happens is a inflated rate of tax is applied on the OAS. Although personally it would be to my financial detriment we should be substantially reducing the starting “clawback” threshold for the CPP to something less than 45,000. At 69,500 we’re just giving money to people to go on cruises. We should also consider giving less than 2x the full monthly amount to couples. As 2 living under one roof certainly live cheaper than a single person. With baby boomers fast becoming pensioners our country just cannot afford OAS with life expectancy of 80 years and beyond. And lets not forget that the OAS age used to be age 70 back in the late 1960′s

  4. I don’t understand why someone making $60k should still collect Old Age Security. I’d rather they increased the monthly payments but only gave it to those making under $30,000.

    • well if you think about it, those who make more money were likely asked to pay more into the system in the first place. so, if you beleive that there should be no relation between amount paid in and amount taken out then you’re right.that’s the problem however, it’s the typical socialist view. From each according to their ability to each asccording to their need. Pretty soon there will be no incentive to work hard and no one, not even people like you will be able to benefit.

  5. I agree with previous posters about reducing the clawback cutoff for the OAS, although maybe not all the way down to $30K. Remember, retired people at the very bottom of the scale already get money from a third source, the GIS, which keeps almost all seniors out of dire poverty.

  6. This was an excellent article back in 2011/12 but is now very much out of date. As of July 1, 2013, we will be able to postpone OAS similar to the provisions for CPP. In other words, OAS will increase by 0.6% for every month you delay (up to age 70)

  7. I think many people confuse the GIS with OAS probably because of the S’s!

    GIS, the guaranteed income supplement, is to try to keep Canadian seniors alive. It ensures a minimum income of about $15000 per year, for seniors who have lived in Canada for 40 years after they turned 18. The GIS is reduced for (almost) every $ of income a senior receives. For example, if you have a pension that pays $10000 a year and CPP that pays 5000 a year, you would not get any GIS.

    I think over the next decade or so, they will start easing back on the OAS (and hopefully easing up the GIS.) I think the target of OAS was people who never contributed to CPP despite working all their life. As those people literally die off it may be easier to start winding down the program. The problem that each government discovers is after paying everyone else’s OAS for years, people deeply and strongly resent any attempt to reduce payments or cut off payments. Changes would have to be introduced very slowly to avoid a political backlash against the party that brings them in.

    As someone mentioned above, most high income earners have been high tax payers all their working lives. So even if they don’t need OAS they don’t see why they shouldn’t get the same amount as someone who never paid any taxes because they were on welfare or were unable to find decent employment for their entire working lives. It’s a political hot potato to cut OAS.

  8. Hi, I am 62 and a permanent resident of Canada and receiving my CPP benefit. I had been living, schooling and working in Canada since my adult life for 30 years.
    I am planning to retire in my native country in the middle of this year and have no intention of coming back to Canada.

    My question is can still apply and receive the OAS when I turn 65? As at that time I would have lost my Permanent Resident status in Canada and will be a foreigner.

    If it will be possible ,how can I apply as I will be outside Canada at that time?
    Your information will be greatly appreciated.
    Thank You

    Jimmy Yong

  9. What is the minimum Old Age Security benefit ? How does one qualify for the maximum Old age security benefit ?

    Thanks, Jodi

    • Jodi

      The Old Age Security (OAS) pension is based on how many years you have resided in Canada after age 18 and before your OAS starts.

      The “full basic” OAS is payable if you have 40 years of such residence in Canada, and that amount is currently $551.54 monthly. The only way to receive more OAS than that amount is if you delay applying beyond the eligible age, in which case it is increased by 0.6% for every month of delay.

      The minimum OAS is normally based on 10 years of residence in Canada, and the amount would be 10/40ths of $551.54 = $137.89. If you qualified for OAS under an international agreement with another country, you could potentially qualify with as little as 1 years of residence in Canada and receive 1/40th of $551.54 = $13.79.

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