Deferring Social Security, CPP, and OAS – A Cross-Border Perspective for U.S. Citizens Living in Canada

For U.S. citizens living in Canada, one of the most important retirement decisions revolves around when to claim government pension benefits. The U.S. Social Security system, Canada Pension Plan (CPP), and Old Age Security (OAS) all provide meaningful retirement income streams. But unlike employer pensions, retirees have a significant degree of choice in when to begin drawing these benefits.

The central question: Is it better to take government pensions as early as possible, or to defer them—sometimes as late as age 70—for higher guaranteed lifetime payments?

For many, deferral seems attractive: each year of waiting permanently increases the size of the benefit. But the choice is not without risks. By deferring, retirees must either fund living expenses from personal savings in the meantime or reduce their lifestyle until benefits start. Deferral also interacts with taxation, particularly for U.S. citizens living in Canada, who must navigate two tax systems, treaty rules, and the OAS clawback.

In this article, we explore:

• How benefit amounts change between full retirement age and age 70 for Social Security, CPP, and OAS
• The tax treatment of these benefits for U.S. citizens living in Canada
• The risks and discount rate considerations
• A detailed example comparing claiming at full retirement vs deferral to age 70
• The special impact of OAS clawback on deferral decisions
• Practical planning considerations for high-net-worth cross-border families

How Social Security, CPP, and OAS Deferral Works

U.S. Social Security

• Full Retirement Age (FRA): For those born in 1960 or later, FRA is age 67.
  • For those born in 1959, FRA is age 66 and 10 months.
  • For those born in 1958, FRA is age 66 and 8 months.
  • For those born in 1958 or before, FRA was in 2024 or before.
• Early Claiming: Benefits can be taken as early as 62, with a permanent reduction of up to 30%.
• Deferral: If delayed past FRA, benefits increase by 8% per year until age 70 through Delayed Retirement Credits (DRCs).
• Example:
  • FRA benefit (age 67): $30,000 USD/year
  • At age 70: $37,200 USD/year (24% higher)
  • At age 62: $21,000 USD/year (30% lower)
• The deferral is actuarially neutral on average but highly sensitive to longevity, portfolio returns, and tax treatment.

Canada Pension Plan (CPP)

• Normal Start: Age 65.
• Early Claiming: Can begin as early as 60, with a reduction of 0.6% per month (7.2% per year). At 60, benefits are 36% lower.
• Deferral: Can be deferred up to age 70, with an increase of 0.7% per month (8.4% per year). At 70, benefits are 42% higher.
• Example:
  • Age 65 benefit: C$15,000/year
  • Age 70 benefit: C$21,300/year (42% higher)
  • Age 60 benefit: C$9,600/year (36% lower)

Old Age Security (OAS)

• Normal Start: Age 65.
• Early Claiming: Not permitted.
• Deferral: Can be deferred up to age 70, with an increase of 0.6% per month (7.2% per year). At 70, benefits are 36% higher.
• Clawback (Recovery Tax): For 2025, OAS begins to be clawed back once income exceeds C$95,915 (indexed annually), and is fully eliminated at around C$155,000 of income.
• Example:
  • Age 65 benefit: C$8,500/year
  • Age 70 benefit: C$11,560/year

Taxation of Benefits for U.S. Citizens in Canada

Cross-border retirees must understand both Canadian tax rules (as residents) and U.S. tax rules (as citizens).

Social Security

• Under the Canada-U.S. Tax Treaty (Article XVIII):
  • If you are a tax resident of Canada, Social Security benefits are taxed only in Canada.
  • Only 85% of benefits are taxable in Canada.
• Canada taxes Social Security as pension income, eligible for pension income splitting with a spouse.
• The U.S. does not tax Social Security for Canadian residents, but you still must report it on Form 1040 with a treaty disclosure (Form 8833).

Canada Pension Plan (CPP) and Old Age Security (OAS)

• Fully taxable in Canada as regular pension income.
• Also reported in the U.S. since U.S. citizens must report worldwide income, but not taxable if a tax resident of Canada, as long as a treaty disclosure (Form 8833) is filed.

Risks and Discount Rate Considerations

The deferral decision is often considered in terms of a discount rate:

• Discount rate = the portfolio return needed to outperform the guaranteed increase from deferral.
• Social Security deferral provides a real (inflation-adjusted) 6–8% return through DRCs.
• CPP and OAS deferral provide 7.2–8.4% nominal increases.

Risks of deferral include:

1. Longevity risk: Deferral only pays off if you live long enough. If you die early, you lose out on years of benefits.
2. Liquidity risk: Deferral requires you to draw more heavily from your own taxable investments or retirement accounts in your 60s.
3. Policy risk: Future changes in Social Security, CPP, or OAS rules could alter the payoff.
4. Tax risk: Higher future benefits may push you into higher tax brackets or trigger OAS clawback.
5. Inflation risk: While Social Security is fully inflation-indexed, OAS is indexed quarterly, and CPP annually, there remains uncertainty in real purchasing power.

For most retirees, the decision hinges on: Do I want guaranteed lifetime income (deferral) or earlier cash flow and flexibility (early claiming)?

Case Study – Claiming at Full Retirement vs Deferring to Age 70

Let’s walk through an example of a U.S. citizen living in Toronto, age 67 in 2025, with the following projected benefits:

• Social Security FRA (67): $30,000 USD/year
• CPP at 65: C$15,000/year
• OAS at 65: C$8,500/year

Assume exchange rate parity for simplicity, and that the retiree is in a 40% marginal combined Canadian tax bracket.

Scenario A: Claim at FRA (67)

• Social Security: $30,000 × 85% taxable = $25,500 taxable; after 40% tax = $15,300 net
• CPP: $15,000 taxable; after 40% tax = $9,000 net
• OAS: $8,500 taxable; after 40% tax = $5,100 net
• Total net annual income: ~$29,400

Scenario B: Defer All to Age 70

• Social Security at 70: $37,200 × 85% taxable = $31,620 taxable; after 40% tax = $18,972 net
• CPP at 70: $21,300 taxable; after 40% tax = $12,780 net
• OAS at 70: $11,560 taxable; after 40% tax = $6,936 net
• Total net annual income: ~$38,688

Difference: Deferring to age 70 produces ~$9,300 more net annual income (real, inflation-protected for Social Security and indexed for CPP/OAS).

Break-Even Analysis

• By deferring, the retiree gives up 3 years × $29,400 = ~$88,200 in after-tax benefits.
• The higher annual net income of $9,300 means break-even occurs around age 84.
• If the retiree lives into their late 80s or 90s, deferral produces significantly more lifetime income.

Special Considerations for OAS Clawback

Unlike CPP and Social Security, OAS is subject to a clawback that acts as an extra tax on higher-income retirees.

• Deferring OAS increases the annual benefit, which increases taxable income. By deferring OAS, the clawback threshold also increases, but at a lower percentage than the OAS income increase.
• As a result, this can accelerate the clawback, reducing or eliminating the advantage of deferral.
• For high-income retirees with expected income consistently above the clawback threshold, deferring OAS is often less attractive than deferring CPP or Social Security.

Practical Planning Considerations

1. Health and longevity expectations
   • If you have a family history of longevity, deferral is more compelling.
   • If health concerns limit life expectancy, early claiming is often best.
2. Portfolio structure
   • Deferral is effectively like “purchasing” an annuity with your savings, but with better guaranteed rates of return.
   • If your portfolio can comfortably bridge the gap, deferral reduces long-term sequence-of-returns risk.
3. Tax planning opportunities
   • Early claiming can leave more RRSPs or IRAs intact, which may later trigger large Required Minimum Distributions (RMDs) or RRIF withdrawals at higher tax brackets.
   • Deferral allows for Roth conversions (U.S. residents only) or strategic RRSP/IRA/401K drawdowns (Canada) in the gap years before benefits start.
4. Spousal coordination
   • Social Security spousal benefits complicate timing. Deferring the higher earner’s benefit usually provides the most survivor protection.
   • CPP survivor benefits are modest, but delaying the higher earner’s CPP can help the surviving spouse.

Conclusion

For cross-border families, the decision to defer Social Security, CPP, and OAS is not just about maximizing benefits—it’s about aligning retirement income with lifestyle, tax planning, and legacy goals.

• Deferring Social Security and CPP generally provides strong, inflation-protected income for life and can reduce portfolio risk.
• OAS deferral must be weighed carefully against the clawback and taxable income management.
• The right choice depends on health, wealth, tax position, and cross-border residency.

At Cardinal Point Wealth Management, we specialize in helping U.S. citizens living in Canada navigate these complex decisions. We integrate cross-border tax planning, retirement income strategies, and estate planning to ensure your government pensions are coordinated with your broader financial plan.