Canadian Government Pensions Exposed: Understanding CPP, OAS, and GIS!
Canadian Government Pensions Exposed: Understanding CPP, OAS, and GIS!
Join Us As We Unlock the Hidden Secrets of Canadian Government Pensions.
Welcome to your go-to guide for Canadian pensions — where simplicity meets clarity! In this article, we’re here to demystify the Canadian Pension Plan (CPP), Old Age Security (OAS), and Guaranteed Income Supplement (GIS). Whether you’re navigating paycheck deductions or pondering pension plans as a self-employed individual, we are going to break it all down for you today.
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Canada Pension Plan or CPP
In this comprehensive overview of the Canadian Pension Plan (CPP), we will detail how it functions and its integration with other components like the Old Age Security (OAS) and Guaranteed Income Supplement (GIS), as many Canadians don’t fully understand the nuances associated with these types of Government Pension plans. Let’s delve into the specifics, starting with an exploration of CPP.
The Canadian Pension Plan (CPP) is for most Canadians a somewhat forced savings plan managed by the government, and you contribute to it through your paycheck with source deductions. However, if you’re self-employed, you might not be putting money into it as you can opt out of it. It’s essential to realize though that if you do not contribute, you won’t receive any benefits from CPP when you retire. Some self-employed individuals avoid contributing because they have to cover both the employee and employer sides. But, when retirement comes around, they may find themselves without enough savings to be able to retire in comfort. Now, if you’re in this situation, talking to an investment advisor portfolio manager is critical to understanding the best possible solutions for you. For others contributing to CPP, the amount you pay into the plan matters. There’s a detailed calculation involved, and a helpful resource is the CPP calculator on my website: joemacek.com which can assist you in estimating the CPP amount you’ll receive around age 65.
However, if you’ve been receiving the CPP survivor benefit, disability, or any monies during child-rearing years, the CPP calculator I’m sharing below might not give you the exact numbers as the calculator doesn’t consider these specific situations.
Simply put, what you get from CPP depends on what you put into it. It’s very much connected to how much money you contribute and the number of years you make the maximum contributions. The maximum CPP payment you can get at age 65 is $1,306 as of 2023, but for many people, the amount they will receive will likely fall between the $700 and $1,200 range. The average CPP payment in Canada is much lower, around $811. This is because most folks don’t contribute the maximum amount. So in our financial projections we do for clients, we typically reduce the CPP and OAS numbers to give a more accurate assessment generally between 50% and 80% of max.
You should know that you have the flexibility to start taking your CPP anywhere between 60 and 70. When you check your CPP number at 65 on the My Service Canada online center, it assumes you’ll keep working and contributing as you are until that age. If you’re 55 and look at that number but stop working today, your CPP estimate will change. This is where the CPP calculator on my website joemacek.com, which I’ll link below, becomes handy for a more tailored projection based on your specific circumstances.
Now if you keep working until 65, you’ll have a pretty good estimate of your monthly CPP amount. It’s crucial to note that CPP is taxable income, meaning you’ll be paying taxes on it. To avoid a hefty tax bill come tax time, you can instruct the CRA to withhold a certain amount for taxes at source. When the time comes, working with your investment advisor portfolio manager can help determine the right amount of withholding tax to take off for your CPP.
Now let’s examine taking CPP early as opposed to late. Taking CPP early comes with a reduction of 0.6% for each month before 65. Conversely, delaying CPP past age 65 offers a benefit, increasing the amount by 0.7% per month.
Delaying CPP past age 65 can be beneficial, increasing the amount by about 8.4% payable each year for the rest of your life. Importantly, if you defer it past age 65, the years from 65 to 70 don’t count as contributory or non-contributory. So, if you retire at 65 or anytime before that and delay CPP until 70, those years between 65 and 70 won’t impact your CPP amount.
If you continue working past 65 and keep contributing to CPP, there’s a post-retirement benefit amount. However, I won’t delve too much into that for this article, keeping the focus on the key elements discussed, but just know there is a benefit to working past 65 and continuing to contribute to CPP.
There are additional benefits worth noting. The Government of Canada website provides pretty extensive information on these, and I’ll briefly mention them here, but you can find more detailed information through the link below. Notably, there’s the post-retirement benefit, disability benefit, and post-retirement disability benefit — each serving distinct purposes. Survivor pensions are also available, as well as benefits for children of disabled or deceased CPP recipients. The nuances of these benefits contribute to the comprehensive support system within the CPP framework. For detailed insights, consult the Government of Canada website as I think it is a valuable resource.
In short, your Canadian Pension Plan (CPP) is likely to be your largest government benefit in terms of income. If you’ve been in Canada for a while and have consistently contributed, it’s probably going to be the largest of all of the plans you can receive.
Moving on, the next notable benefit is the Old Age Security benefit or OAS. If you haven’t contributed much to CPP, then OAS might play a more significant role for you.
The distinction between OAS and CPP lies in how they’re calculated. Old Age Security is based on the duration of your presence in Canada, not the amount you contributed. So, if you’ve been in the country for an extended period, OAS may become a more substantial part of your retirement income.
To make it simpler, CPP is calculated based on the amount you contributed, while Old Age Security (OAS) depends on the number of years you’ve spent in Canada. To receive the maximum OAS amount, you had to have been in Canada for the maximum amount of time they look at which is 40 years. If you’ve been in Canada for, say, 20 years between the ages of 18 and 65, you’d only receive 50% of the full OAS benefit. However, if you’ve been here for 40 years or more during that period, you will likely qualify for the full OAS amount.
As of 2023, the full OAS amount at age 65 is $691. When you surpass 75, there’s a 10% increase, and the current maximum reaches $760.10. This information helps you understand how OAS is structured and what factors influence the benefits you receive.
A critical point to consider with Old Age Security (OAS) is the potential for clawback if your income exceeds a specific threshold. This is often referred to as being “clawed back,” officially known as the pension recovery tax. As of July 2023, the income threshold, based on your 2022 income, is set at $81,761, and this is the level your OAS begins to be recovered by the Canadian Government.
For every dollar over this threshold, there’s a clawback of 15%, or $0.15. It’s essential to note that this threshold applies to personal income, not household income. If you’ve engaged in income splitting or other strategies, this can impact how the clawback is calculated.
Once you reach the maximum threshold, which stands at $134,626, you’ll experience a complete clawback of your OAS benefits. It’s important to note that this upper threshold is slightly higher for individuals aged 75 or older due to the additional boost. For those individuals, the threshold increases to $137,331. This adjustment accounts for the percentage increase in benefits for individuals over 75, providing a bit more leeway on the higher end for the clawback.
While it might be seen as a positive situation to have a higher income, it’s crucial to plan accordingly, especially considering potential clawbacks. Many financial projections we’ve worked on show a close call with the clawback threshold, emphasizing the importance of strategic financial planning in retirement.
In some cases, clients may find it challenging to completely avoid the recovery tax. However, the goal is to strike a balance where you can maximize your income and minimize the impact of taxes. This might involve accepting the recovery tax as a testament to a great income while still aiming to preserve as much as possible for your financial well-being.
It’s also important to note that OAS calculations are based on income from previous years income, depending on various factors. This time delay aspect adds another layer of consideration, emphasizing the need for a forward-thinking and adaptable financial projection.
If you had a substantial income in the previous year and are recently retired, for that time delay reason, it might be prudent to consider deferring your OAS application past the age of 65. This delay can also offer benefits, including a monthly increase in your OAS amount. Yes, you can delay your OAS payments until the age of 70 and increase your amounts.
Now let's talk about the last Government pension plan, the Guaranteed Income Supplement, or GIS for short. For individuals or couples in a lower income tax bracket, there’s potentially an additional income source known as the Guaranteed Income Supplement. While not everyone qualifies for GIS, in fact, most won’t. It’s worth exploring as it is based on your household income. An example is a person who recently started receiving OAS and, upon application, discovered they were eligible for a modest GIS, showcasing the potential additional financial support available through these government programs.
Discovering additional financial support through the Guaranteed Income Supplement (GIS) can be a valuable component of your overall retirement income. While the GIS amount may not be substantial, even an extra $100 per month can contribute significantly to your financial well-being. Applying for GIS is integrated into the Old Age Security (OAS) application process, as it is income-based and automatically triggered.
Furthermore, if you do qualify for GIS and have a spouse or common-law partner aged between 60 and 64 who is not yet collecting OAS, there may be additional allowances available. Although the specifics aren’t delved into for this article, it emphasizes the layered nature of government benefits. From CPP to OAS and GIS, along with allowances, survivor benefits, and death benefits, understanding the intricate details of these programs becomes essential.
Another positive aspect is that these Government benefit payments are adjusted for inflation, providing a small hedge against the impact of rising living costs. In times of high inflation, having your CPP, OAS, and GIS payments increased accordingly helps ensure that your income keeps pace with the changing economic landscape.
For those currently receiving CPP, OAS, and GIS, there’s likely been a noticeable increase in your payments. This underscores the importance of strategic decisions, such as deferring your CPP benefit until age 70. By doing so, not only do you help secure a larger pension, but this larger amount is also subject to inflation adjustments. This strategic move can provide an increased benefit, especially if there is another surge in inflation later in life.
Another very important piece of information, especially for those who are currently collecting CPP disability, is that when CPP disability stops at age 65, there’s no automatic requirement to start receiving regular CPP payments. Instead, you have the flexibility to defer your CPP payments until a later age, potentially maximizing the amount you receive.
If you are approaching retirement, this article serves as a reminder to look into the details and understand the nuances of these government benefit programs. In essence, these government benefits are part of a larger puzzle in retirement planning. Making informed decisions about when to start receiving benefits and how to optimize them based on your unique circumstances can significantly impact your financial well-being in retirement.
Did you know that navigating the uncertainties of the markets and your finances is generally smoother with the support of an investment advisor or portfolio manager? Studies consistently reveal that individuals who work with investment advisors and portfolio managers tend to have up to three times higher net worth on average, but that’s not all, there’s a significant impact on overall well-being, with those who seek professional advice exhibiting higher levels of happiness and lower anxiety. Having a guiding hand through the financial landscape proves beneficial not only in terms of monetary outcomes but also in fostering a sense of security and contentment, making the challenges of an uncertain year more manageable with professional assistance.
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Joe A. Macek, FMA, CIM, DMS, FCSI
Investment Advisor, Portfolio Manager
iA Private Wealth | iA Private Wealth USA
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