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
· Talk about the new Pooled Registered Pension Plans
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.
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:
· The CPP breakeven points
· Should you take 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.
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
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.
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.