Understanding the Old Age Security Program

Defining the Old Age Security (OAS) Program

The Old Age Security (OAS) program is a pillar of Canada's public retirement income system. The program provides a modest base upon which individuals can build their retirement income. The aim is to ensure a minimum income level for seniors and alleviate poverty among Canada's senior population. Most seniors are eligible for OAS pension, which they can start receiving as early as 65 years of age.

Eligibility for OAS Program

Even though most seniors are eligible for the OAS pension, not everyone qualifies. The eligibility criteria are based on both age and legal status. To start, you must be at least 65 years old. Secondly, you must be a Canadian citizen or a legal resident at the time your OAS pension application is approved. You must also have resided in Canada for at least 10 years since the age of 18 to qualify for full OAS benefits. There is a partial OAS for those who have stayed for less than 10 years but more than 1 year in Canada.

Payment Process for OAS

The amount that one can receive through OAS varies depending on various factors including the length of residency and income level. The payment rates are revised quarterly in January, April, July, and October, based on the Consumer Price Index. Payments are made on a monthly basis every fourth Tuesday of the month and are taxable. A maximum amount is established and adjusted periodically. For instance, as of the last quarter of 2020, the maximum monthly OAS payment is $613.53.

Calculating Your Old Age Security Benefit

Calculating Full OAS Pension

The amount of your OAS pension will be determined by how long you have lived in Canada after the age of 18. If you have lived in Canada for at least 40 years after turning 18, you can receive the full OAS pension. The maximum monthly OAS payment amount as of the last quarter of 2020 was $613.53. However, this amount changes quarterly as it's adjusted to reflect the cost of living changes.

Calculating Partial OAS Pension

If you have not resided in Canada for the full 40 years after the age of 18, you may qualify for a partial OAS pension, which is equivalent to 1/40th of the full pension for each complete year you resided in Canada after turning 18. For instance, someone who has lived in Canada for 20 years after their 18th birthday could receive half of the full pension.

Understanding OAS Clawback

The Canadian government reduces the OAS pension for high-income earners in what's commonly referred to as the OAS Clawback. The reduction starts kicking in when your net world income exceeds the set threshold, which for 2020 tax year, was set at $79,054. The full monthly pension is reduced by 15% of the amount by which your annual income exceeds the threshold. If your income reaches a ceiling of $128,137, your OAS is fully clawed back.

Estimating the Future Value of Your OAS Pension

OAS Indexing

OAS benefits are indexed quarterly which means they are adjusted for inflation every 3 months based on the Consumer Price Index. This ensures that the value of OAS pension doesn't diminish over time due to inflation. Therefore, when estimating your OAS pension in future, you should take this indexing into account.

Impact of Resident Status

If you plan on living abroad in your retirement years, you need to understand how this will affect your OAS pension. The pension is fully taxable regardless of where you live. However, how much you can receive when living outside Canada depends on your years of residence in Canada. If you resided in Canada for 20 years or more after the age of 18, you can receive the pension payment outside Canada for as long as you live.

Longevity and Your OAS Pension

The OAS pension is a lifetime benefit. This means that estimating the total value of your OAS pension in future also depends on how long you live. As people's life expectancies continue to increase, you might end up receiving the OAS pension for a longer period than anticipated. Therefore, it's also important to factor in your life expectancy when predicting your OAS pension.