Should you apply for OAS even if you have a high income?
A friend said I should apply for OAS right away even though it will all be clawed back. I am worried about the tax ramifications.
—Greg
Old Age Security (OAS) can start as early as age 65 or be deferred to age 70. For each month of deferral, the pension increases by 0.6% (7.2% annualized). To be clear, that does not mean there is a 7.2% return if you defer OAS. You give up a year of pension to have a 7.2% higher pension for life.
If you consider the cumulative OAS pension payments, if you defer by a year, you’ll be playing catch-up for the next 13 years. In other words, if you defer your OAS to age 66, it will take you until age 78 to receive more cumulative OAS compared to starting at age 65.
If you defer your OAS to age 70, it would take only 11 years, to age 81, to catch up on the cumulative payments, but you’ll be that much older and have less time to catch up as well.
There is a time value to money, such that receiving a dollar today is better than receiving a dollar next year. That is because you can invest that dollar, or you do not have to draw down your other investments as much and can keep them invested. As a result, depending on the assumptions used, you may need to live well into your 80s to be better off for having deferred OAS.
When is OAS clawed back?
In the case of a high-income earner like you, Greg, there is a disincentive to starting the OAS pension early. This is because it is means-tested with a partial reduction in the pension for those whose net income exceeds $81,761, with a full repayment at $133,141 of income. This repayment, or clawback, is calculated as 15 cents for every dollar your income exceeds the low end of this threshold.
At $200,000 of income, you would be well past the upper end of the threshold. A 65-year-old whose income is high should probably consider deferring their OAS until their income decreases or until as late as age 70.