OAS & CPP Facts and Myths

I've heard from dozens of people planning for retirement that they don't want to earn money in retirement because the government will claw back their Old Age Security and Canada Pension Plan payments.  I have to say that this course of thinking is based on some myths that actually encourage people to make less money when they probably need it most.  Below are the numbers that hopefully help those who have questions about OAS and CPP get the maximum benefit during their retirement.

Old Age Security (OAS) Facts:
2011  Maximum Monthly Benefit                                     $524.23 ($6,506.23 annually)
2011 Average Monthly Benefit to be paid out                    $490.47 ($5,885.64 annually)  
Individual Annual Income before any clawbacks start    $67,668.00
Individual Annual Income when no OAS is received    $109,607.00

The government will not start to claw back any OAS unless your annual income is over $67,668.  Even then, it is only a portion of the OAS benefit that is clawed back at that income level.  An individual will receive a decreasing amount of OAS benefit as the income level climbs, eventually receiving no OAS benefit if the annual income level reaches $109,607.  According to Human Resource Development Canada, only 5% of seniors have OAS payments reduced because of income levels, showing that it really shouldn't be a concern to most seniors.  The average income for those aged 65 to 74 in 2010 was only $35,200.  Those most likely affected by a clawback are people still working after turning 65 years old.

Unfortunately, there are many people who deliberately earn less money on their investments and savings out of fear of the OAS clawback, even though their income is far below the $67,688 level, the minimum income needed before clawbacks begin.  These people are losing out on valuable investment income for no reason, other than there is a "myth" being told over and over again that OAS clawbacks are causing significant hardship on seniors.

Canadian Pension Plan (CPP) Facts:
2011  Maximum Monthly Benefit                              $960.00 ($11,520 annually)
2011 Average Monthly Benefit to be paid out             $504.50 ($6,054 annually)  
2011 Maximum Survivor's Benefit (over 65)                $576.00 ($6,912 annually)
2011 Average Monthly Benefit to be paid out             $297.72 ($3,572.64 annually)

The first thing you will note from the figures above is that while the maximum monthly CPP benefit is $960, the average person only receives just over $500.  This means that you will probably not receive the full benefit, in fact probably closer to half of the full benefit.  

The way CPP benefits are calculated is based on how long you have contributed to CPP and how much you have contributed.  To receive full benefits you must have contributed to the Canadian Pension Plan for 40 or more years between 18 and 65 years of age, and contributed CPP to the Yearly Maximum Pensionable Earnings amount set by the government each year.  Most of us, while maybe working 40 or more years, have not contributed the maximum CPP amount during each year of work, meaning we will not qualify for the full benefit.  For farmers and small business owners who often do not contribute to CPP at all (tax savings), this means they will receive no CPP benefit when they retire.

Frequently Asked Questions (FAQ):
Will there be CPP when I retire?   In 1997 the government significantly revamped the funding of the Canadian Pension Plan so it would be able to fund itself for years to come.  CPP contributions were split out from General Revenue, contributions were increased, and the CPP Investment Board was created to invest into a diverse range of income earning assets.  CPP has been building since then, with more money coming in than going out.  As the Baby Boomers retire, CPP fund will be impacted but good management should see CPP last even with the mass retirement of this large generation.  Note:  While CPP should be there for your retirement, even the maximum amount is not enough to live on by itself.


What happens if I retire early?  The government is trying to encourage citizens to not withdraw their CPP early.  While 65 is still the standard age set for CPP recipients, you can receive CPP earlier if you apply for it.  However, this comes with a reduction in the amount of CPP received by an amount of  0.6% per month before your 65th birthday.  Thus if you retire at 60 and apply for CPP then you would decrease your monthly amount by 36% (5 years X 12 months X 0.6% reduction =  36%).  On the other hand, if you can postpone taking CPP for 5 years you will get a bonus of 42% (5 years X 12 months X 0.7% bonus = 42%) on your monthly benefit.  As we are living longer, this may be the best way to go, if you can do it.

Does CPP have a clawback?  No, it does not.  OAS does have a clawback, but CPP does not.

Hopefully the above helps clear up some myths and misconceptions about OAS and CPP.  If you have any questions about retirement planning, talk to one of our retirement planners to get the information you need.  Jerry