The deferral budget announced by the government this past spring signals what some would say is the "beginning of the end" for early retirement. Canadians will be working longer and drawing less when it comes to both their Old Age Security (OAS) and Canada Pension Plan benefits. The budget also adds more flexibility and greater complexity to retirement planning, by allowing for the deferral of OAS benefits to age 70. The biggest losers of the changes are low-income seniors, as eligibility for Guaranteed Income Supplement (GIS) benefits changes from age 65 to 67. The Spouses Allowance (SA) is also being deferred by two years.
The fine print
Finance Minister Jim Flaherty introduced far-reaching changes to the pension landscape for Canadians. The increase in the age of eligibility will be phased in over a six-year period, beginning April 1, 2023, through February 1, 2029 as indicated in this table:
Phase-in of Higher Age of Eligibility for OAS and GIS Benefits
|Date of Birth||Age of OAS/GIS Eligibility||Date of Birth||Age of OAS/GIS Eligibility|
|Prior to April 1, 1958||Age 65||February 1 – March 31, 1960||Age 66|
|April 1 – May 31, 1958||Age 65 + 1 month||April 1 – May 31, 1960||Age 66 + 1 month|
|June 1 – July 31, 1958||Age 65 + 2 months||June 1 – July 31, 1960||Age 66 + 2 months|
|August 1 – September 30, 1958||Age 65 + 3 months||August 1 – September 30 ,1960||Age 66 + 3 months|
|October 1 – November 30, 1958||Age 65 + 4 months||October 1 – November 30, 1960||Age 66 + 4 months|
|December 1, 1958 – January 30, 1959||Age 65 + 5 months||December 1, 1960 – January 30, 1961||Age 66 + 5 months|
|February – March 31, 1959||Age 65 + 6 months||February 1 – March 31, 1961||Age 66 + 6 months|
|April 1 – May 31, 1959||Age 65 + 7 months||April 1 – May 31, 1961||Age 66 + 7 months|
|June 1 – July 30, 1959||Age 65 + 8 months||June 1 – July 30, 1961||Age 66 + 8 months|
|August 1 – September 30, 1959||Age 65 + 9 months||August 1 – September 30, 1961||Age 66 + 9 months|
|October 1 – November 30, 1959||Age 65 + 10 months||October 1 – November 30, 1961||Age 66 + 10 months|
|December 1, 1959 – January 30, 1960||Age 65 + 11 months||December 1, 1961 – January 30, 1962||Age 66 + 11 months|
|February 1, 1962 or later||Age 67|
What this suggests is that the next generation of Canadian workers are expected to be active in the workforce an additional two years prior to drawing public pension benefits.
The SA is an income-tested benefit, currently paid to the surviving spouse of CPP beneficiaries who are between the ages of 60 and 64. The budget also delays by two years eligibility for the SA. Effective April 1, 2023, eligibility for the SA will be gradually delayed, through until 2029, when the allowance will be paid to survivors age 62 and over.
It is widely anticipated that these changes will have the biggest impact on seniors with lower incomes, many of whom are single. If this measure took effect immediately, some 700,000 low-income seniors would be affected, according to Dr. Michael Wolfson, Canada Research chair in Population Health Modeling.
The Government of Canada has committed to compensate the provinces for any "net additional costs" of the change to the OAS and the GIS. The budget provides no estimates of the cost savings to the federal government of delaying OAS/GIS eligibility by two years. The budget documents also do not outline the impact of these changes on Canadians who receive partial OAS benefits. Generally, these are recent immigrants to Canada (since 1977) who have lived in Canada for less than 40 years.
Impact on workplace pensions
The federal budget could also have a significant impact on private pension plans – many of which are designed to supplement OAS and CPP benefits prior to age 65.
For employees of the federal government, the budget announced that early retirement will be eliminated for employees hired in 2013 and beyond, i.e., early retirement at age 60 will be replaced with normal retirement at age 65.
Deferring OAS benefits
The budget provides greater flexibility when it comes to receiving OAS benefits. Currently, OAS benefits are payable at age 65, and the current benefit is $540 per month (indexed quarterly based on increases in the Consumer Price Index.)
Effective July 1, 2013, a senior may elect to defer receiving OAS beyond age 65 and receive a higher benefit. The initial OAS benefit rate will be increased by 0.6 per cent per month of deferral, or 6.2 per cent per year, if benefits are deferred beyond age 65.
Receipt of OAS benefits can be deferred by up to five years, to age 70. This table shows what this means for the maximum OAS benefits payable by year, to age 70, based on the current OAS benefit levels of $540 per month.
|Age of Receipt||Maximum OAS Benefits Per Month||Maximum OAS Benefits Per Year|
|Age 70 & older||$734.56||$8,814|
It is important to distinguish this change in the OAS from recent CPP changes.
Currently, a CPP contributor may elect to receive their retirement benefits prior to age 65 at a reduced rate, or defer benefits (to age 70) and receive higher benefits. However, the change in the OAS only allows for the deferral of the benefits, i.e., there is no provision to elect to receive OAS benefits prior to age 65.
CPP and early retirement
Since 1987, the CPP allows for benefits to be paid prior to age 65, at a reduced rate. Until 2011, the amount of the reduction was .5 per cent per month, or 6 per cent per year prior to age 65. For example, the maximum CPP retirement pension commencing at age 65 in 2012 is $986.67 per month. You may elect to receive your CPP retirement pension as early as age 60, in which case the amount is reduced by 30 per cent, i.e., a maximum of $690.67 per month. Alternatively, you may elect to defer your CPP retirement pension to age 70, in which case the benefits increase by the same 30 per cent.
Effective January 1, 2012, these percentage adjustments increase for CPP pensions commencing prior to and beyond age 65, i.e., 6 per cent per year changes to 7.2 per cent and 8.4 per cent per year for early and late commencement, respectively. The higher adjustment factors for deferred commencement are being phased in as follows:
|Year of CPP Application||CPP Monthly Adjustment Factor||CPP Annual Adjustment Factor|
This change to the CPP was designed to remove incentives for early retirement, and to encourage Canadians to continue making CPP contributions beyond age 65.
An end to Freedom 55
Budget 2012 changes the retirement income equation. The current generation of baby-boomers will have the regular CPP and OAS benefits commencing at age 65, while the next generation (i.e., anyone born after 1958) will start receiving their OAS benefits two years later.
The biggest impact of the budget affects low-income near seniors and surviving spouses. Their eligibility for GIS and SA is being delayed by two years.
Tony Wohlfarth holds a CEB designation from Humber College and the Audit Committee Certification (ACC) designation from McMaster University. He is currently a pension consultant with Nelligan O'Brien Payne LLP (www.nelliganlaw.ca) in Ottawa.
NOTE TO READERS: The views of the author do not necessarily reflect those of Coyle Publishing. This article is provided as a general source of information only and should not be considered to be personal investment or legal advice, or a solicitation to buy services. Readers should consult with their financial or legal advisor to ensure that it is suitable for their circumstances.
[This article was originally published in the July/August 2012 issue of Fifty-Five Plus Magazine.]