Increases in OAS Benefits

As of July 2022, some Canadians will be seeing an increase in their Old Age Security pension benefits. There were a couple of changes announced in last year’s budget that are starting to now come into play. As a refresher, there are two main federal pensions in Canada, the Canadian Pension Plan (CPP) and Old Age Security (OAS).

If you’re working there is a good chance you’re paying into CPP and your contributions are being matched by your employer. CPP is not funded by the government, it’s funded by you and your employer. All of those contributions from working Canadians and their employers have grown, and there is now a big pot of money. The CPP fund is currently over $500 billion.

There is an investment board tasked with managing those funds and ensuring CPP is sustainable. By contrast, no one pays directly to OAS: there is not a big pot of money set aside for OAS, it’s funded by the federal government. We all pay taxes and some of that money ends up in OAS. The program is not based on employment income, it’s based on residency.

If you live in Canada long enough, you get a pension. If you live in Canada for 10 years after the age of 18, you will receive OAS. After 40 years, you can receive the maximum pension. OAS starts at the age of 65 and for 2022, the maximum monthly pension is $666.83. As a part of the OAS program, you can receive additional benefits through guaranteed income supplement, allowance, and allowance for survivors, assuming your income is below a certain threshold.

If your income happens to be above a certain threshold, the OAS recovery tax kicks in, and your OAS pension is reduced. Both CPP and OAS are indexed, while CPP is adjusted annually for inflation, while OAS is indexed quarterly. In 2021, a few budget changes were announced for OAS. The first item was a one-time payment of $500, paid in August 2021, to those who were eligible for OAS and were over the age of 75. The second change included a 10 per cent increase to the OAS pension for those over the age of 75 which took effect in July 2022.

Starting last month, those over the age of 75 will get a 10 per cent bump in their OAS pension, making the maximum OAS for those over 75 is now $733.51. By the end of June of 2022, if you were 75 or older, the increase in OAS took place automatically. If you are not 75 yet, the month following your 75th birthday, the raise will kick in and there will automatically be a 10 per cent increase in your OAS.

The bump in OAS will also have a minor impact on the recovery tax. To put it simply, if you have a larger OAS benefit, it will require a higher income for the entire pension to be clawed back. At the moment, the threshold for 2022 income, for the OAS recovery tax is $81,761. For every $1 over that threshold, the government reduces your OAS by 15 cents. It’s essentially a 15% tax. If you are under 75 and receiving the max OAS, once your income hits $134,253, you will not receive an OAS pension. With the recent change, if you’re over 75 and receiving the max OAS, it will require an income of about $136,920, before your OAS is entirely clawed back. OAS and CPP provide income during retirement and are intended to be compliments to your own savings and pensions. They should be considered as your overall financial plan.

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The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability.

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