When Should You Take CPP and OAS? Building Your Retirement Income Floor

Part 2 of a 7-part series on retirement income in Canada

The Canada Pension Plan and Old Age Security occupy a strange position in retirement planning. They are more substantial than most people realize, and yet for the people I work with they are

one part of a much larger picture, and how large a part varies widely from one retirement to the next. What makes them important is not their size. It is that they are the only part of the picture that is guaranteed, indexed to inflation, and paid for life, which protects cashflow into the later years and gives the plan a source of income that does not depend on investments. The decision about when to start them is also the one people rush more than any other. In my office, people often arrive having already decided to take CPP at 60 or 65, usually on the strength of a rule of thumb, a neighbour's advice, or a vague worry that the money will not be there later. The decision deserves better than that, because it is one of the most valuable choices in all of retirement planning, and unlike an investment decision, it cannot be revised once it has settled.

This post works through the questions I hear most often about the two programs, in the order in which people usually ask them. Part 1 of this series argued that a secure retirement begins with an income floor. CPP and OAS are where that floor begins.

What are CPP and OAS actually worth?

More than most people give them credit for. Together, the two programs provide income that arrives every month for as long as you live, rises with inflation, and does not depend on what markets do. In the language of Part 1, they are the purest form of a floor, and they carry the built-in permission to spend that research by David Blanchett and Michael Finke found retirees respond to so strongly.

It is difficult to buy an equivalent product. An inflation-indexed lifetime annuity from an insurance company, to the extent one can be found at all, is expensive precisely because what it provides is so valuable. This is why Moshe Milevsky and Alexandra Macqueen, in Pensionize Your Nest Egg, treat government pensions as the foundation that everything else is built around. When you make a claiming decision about CPP or OAS, you are not deciding when to collect a benefit. You are deciding how large the guaranteed, inflation-protected part of your retirement will be for the rest of your life.

When should I take CPP?

The short answer: later than most people do, if your health and your savings allow it.

The mechanics first. You can start CPP any time between 60 and 70. Starting before 65 reduces the payment by 0.6% for each month of early take-up, which works out to a 36% reduction at age 60. Starting after 65 increases the payment by 0.7% for each month of delay, which works out to a 42% increase at age 70. Layered on top of those adjustments, the benefit itself is indexed in ways that generally push the age-70 amount higher still. The result is that a CPP pension started at 70 is more than twice the size of the same person's pension started at 60, and that larger amount is then paid, with inflation protection, for life.

Now the behaviour. Research led by Bonnie-Jeanne MacDonald at the National Institute on Ageing found that roughly 95% of Canadians take CPP at 65 or earlier, and only about 1% wait until 70. Her work puts a figure on what the rush costs: an average Canadian receiving the median CPP amount gives up roughly $100,000 of lifetime income by starting at 60 instead of 70. That figure is not a return that depends on markets cooperating. It is the price of a decision made once, often quickly, and often for reasons that do not survive examination.

Why do so many people take it early, then?

In my experience, four reasons come up again and again.

The first is breakeven thinking. People calculate the age at which the larger deferred pension catches up to the smaller early one, conclude that they would need to live to roughly 80 or beyond to come out ahead, and decide the wait is a gamble on their own lifespan. MacDonald's research argues that this is the wrong frame entirely, and I agree with her. The purpose of CPP is not to maximize the total collected if you die on schedule. It is to protect you if you do not. The years in which the deferred pension pays off are exactly the years in which you will most need the money: your late 80s and 90s, when other savings may be depleted, and when the cost of care is rising. Viewed that way, deferral is not a bet on living long. It is insurance against it, and the premium is being paid at the time in your life when you can best afford it.

The second is the bird-in-hand instinct. A payment available today feels safer than a promise of a larger one later. This is the same wiring that Part 1 spent two thousand words on, and it responds to the same treatment: a plan that shows, in writing, where the money comes from during the waiting years.

The third is the belief that CPP might not be there. CPP is funded by contributions and an independently managed investment fund, it is reviewed by the federal and provincial finance ministers on a regular cycle, and the Chief Actuary of Canada assesses its sustainability decades into the future. Whatever concerns a person may have about government finances generally, CPP is among the most secure retirement promises available to a Canadian.

The fourth reason is different in kind: some people genuinely need the cashflow. If there is nothing else to draw on, or the timing of other income is not right, then relying on CPP at 60 and OAS at 65 is not a mistake to be corrected. It is the plan working with what it has. The first three reasons should be examined and often challenged. This one should be respected, and the planning work shifts to making the most of the payments rather than second-guessing when they started.

When should I take OAS?

OAS follows different rules, and the answer is different too.

OAS cannot be started before 65. It can be deferred to 70, with the payment growing by 0.6% for each month of delay, to a maximum increase of 36%. The deferral reward is smaller than CPP's, and OAS also carries a feature CPP does not: at 75, the payment increases by a further 10% automatically.

For most people, taking OAS at 65 is reasonable. Deferral makes sense mainly in two situations. The first is when income between 65 and 70 would be high enough that much of the OAS would be lost to the recovery tax anyway, which is common for people still working or drawing large amounts from other sources. The second is when the plan is deliberately building the largest possible guaranteed floor, in which case the 36% larger payment, indexed for life, is worth the wait for the same insurance reasons as CPP.

The reverse case matters just as much. For someone whose income after 70 will be high, once a deferred CPP, a defined benefit pension, and mandatory RRIF withdrawals are all flowing, OAS may face the recovery tax no matter when it starts. In that situation, deferring OAS forfeits payments without buying anything. Taking it at 65, during the lower-income bridge years, collects five years of OAS that would otherwise be lost, and the clawback that arrives later was coming either way.

What is the OAS clawback, and should I worry about it?

The clawback, formally the OAS recovery tax, reduces OAS by 15 cents for every dollar of net income above a threshold. For the 2026 tax year, that threshold is $95,323, and it is indexed each year. OAS disappears entirely once income passes roughly $155,000. The reduction applied to your monthly payments in any July-to-June period is based on the prior year's tax return, so the effect of a high-income year shows up with a delay.

Should you worry? Less than most people do, and differently. The clawback only applies to income above the threshold, so a retiree at $100,000 of net income loses a portion of OAS, not the whole thing. The retirees genuinely exposed are usually those with large mandatory RRIF withdrawals, significant taxable investment income, large defined benefit pensions, or one-time events like a property sale. The good news is that exposure of that kind responds well to planning: the order you draw from accounts, the timing of withdrawals, income splitting between spouses, and the use of TFSA income, which does not count toward the threshold at all, can each move a household below the line. That set of decisions is the subject of Part 4.

What I would caution against is letting the clawback drive the whole plan. Giving up income to avoid a 15% recovery is rarely sensible arithmetic, and I have watched people make themselves genuinely poorer to win a fight with a tax they misunderstood.

If I wait, what do I live on in the meantime?

This is the practical question underneath the whole claiming decision, and it is where the pieces of this series meet. Deferring CPP and OAS to 70 does not mean living on nothing until 70. It means the portfolio, usually the RRSP, does more of the work in the early years, while the government pensions grow in the background.

MacDonald's research makes exactly this point: most Canadians with meaningful RRSP savings can fund the bridge years from those savings without disrupting their lifestyle, effectively trading a portion of a market-dependent account for a larger guaranteed pension. The exchange usually improves the retirement on both sides. The early years are funded at the same standard of living, and the later years are protected by a floor that is more than twice as high. There are also tax advantages to drawing the RRSP down earlier, which Part 3 covers in detail.

The people who should not defer are just as identifiable. Anyone whose health or family history points to a shortened life expectancy has a genuine reason to start early. So does anyone who simply needs the income now and has no savings to bridge with, and so does anyone for whom the waiting years would be funded by high-interest debt. The point of the research is not that everyone should wait until 70. It is that the decision should be made with the real numbers, and that the current default, in which 19 of every 20 Canadians claim at 65 or earlier, does not reflect what the real numbers say.

What is the decision to take from this?

Treat the CPP and OAS claiming dates as two of the most consequential decisions in front of you, and give them the same attention you would give a decision involving several hundred thousand dollars, because that is what they are. For a healthy person with savings to bridge the gap, the evidence points toward deferral, and toward CPP deferral in particular. For others, the right answer is different, and the only way to know which group you are in is to run your own numbers within your whole plan rather than borrowing a conclusion from someone else's.

The next post moves to the account most Canadians will bridge with: the RRSP, what happens when it becomes a RRIF, and why the government's minimum withdrawal schedule is almost never the schedule that serves you best.

Sources

Blanchett, D. and Finke, M. Guaranteed Income: A License to Spend. Retirement Income Institute, Alliance for Lifetime Income. https://ssrn.com/abstract=3875802

MacDonald, B.-J. (2020). Get the Most from the Canada and Quebec Pension Plans by Delaying Benefits. National Institute on Ageing, in collaboration with the FP Canada Research Foundation.

MacDonald, B.-J. 7 Steps Toward Better CPP/QPP Claiming Decisions (paper series). National Institute on Ageing. https://www.niageing.ca/cpp-qpp-overview

Milevsky, M. and Macqueen, A. (2015). Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income for Life. Second edition, Wiley.

Government of Canada. Old Age Security pension recovery tax. canada.ca.