Bump your OAS 36%

The federal government now permits people who turn 65 to delay the start of their Old Age Security pension (OAS) until 70. Why would anyone do this? Because you’ll receive 36% more OAS pension if you do.

Consider someone who has just turned 65 and is receiving the current maximum OAS pension of $549.89 a month. If future inflation is 2% a year, this will grow to $607 in 2018 by age 70. By delaying OAS five years, the first monthly payment would be $825.

But it is a pretty safe bet that few seniors take the government up on this offer, which became effective July 1. The Canada Pension Plan has allowed for a delayed start with a higher pension for many years now and gets almost no takers.

It seems the bird in the hand is too hard to pass up. Moreover, there is the pervasive (if unfounded) fear that CPP pensions will be taken away at some point so seniors should take it while they can. Another reason often heard for starting pensions earlier is that people want to get the most out of CPP in case they die young.

There is no reason to think people will act any differently with their OAS pensions, but there are several reasons why they should. First, OAS at 70 has a greater actuarial value than OAS at 65 in the current low interest rate environment. The actuarial value starting at 70 is about 6% higher than at 65, at least in the case of women. The difference will be smaller for men since they don’t live as long on average.

An even better reason to consider OAS at 70 is that it lessens anxiety about the future. Surveys consistently show that, aside from health, the biggest fear among retirees is they will outlive their savings. So why not use up one’s riskiest retirement savings first (i.e., RRSPs) and maximize the payments that are not only secure for life but inflation-protected to boot (i.e., CPP and OAS)?

While the calculations get a little complicated, the end result is that one is further ahead financially by starting OAS at 70, provided that one lives until age 87 or longer.

Another reason to delay OAS pension has to do with the clawback. For every dollar of income you earn over a certain threshold ($70,954 in 2013), 15% is “clawed back” by the government. Earn more than $114,793 and you don’t get to keep any of your OAS pension at all. If you have substantial income after age 65 that will drop off by age 70, this suggests not applying for OAS until 70. You might be able to minimize the clawback by waiting.

There is a lot of skepticism about the long-run viability of the Old Age Security pension first and the government has taken a couple of measures that make it even harder to trust it. First, it introduced the clawback in the 1980s and second, it raised the start date to 67 (for future retirees).

In all likelihood, a bird in the hand will be the deciding factor.