CPP: What you need to know
Talking about the Canada Pension Plan might be at the top of the “most boring conversations” list, but like many things in life, it’s good to have at least a basic understanding of what it is. If you have ever had a job in Canada, you’ve paid into the plan and will be entitled to a pension payment later in life. So what’s the money doing for you?
The Canada Pension Plan – or CPP – is exactly what it sounds like: a pension plan run by the government of Canada. Just like a company pension plan, you contribute and your employer contributes. The money is invested and when you reach 65, you get a monthly payment for the rest of your life. It’s a form of forced retirement savings designed to give you at least some guaranteed retirement income.
How much you will get depends primarily on one thing: how many years you contributed to the plan. It also depends on how much income you’ve earned over those years. Someone who has worked and paid the maximum annual amount into CPP every year for 40 years would receive a pension of $15,700 a year. That means you’d have worked a full-time job from age 25 to 65. Many people haven’t done this and therefore won’t qualify for this amount. For example, I worked full time from age 23 to 47, contributing to CPP. I became self-employed and stopped contributing in 2021. I expect I’ll receive somewhere around $1,000 a month starting at age 65.
You can get an estimate of how much CPP you’ll be entitled to by logging onto My Service Canada, choosing the CPP page, and clicking on “Contributions” near the bottom of the page. The number you get will be based on the contributions you’ve made so far in your working life.
This $15,700 might not sound like much and surely isn’t enough to live on – it’s not supposed to be. The plan is designed to replace 25% of your working income and is only one piece of your retirement savings plan. Another source of retirement is Old Age Security, or OAS. You don’t contribute to OAS – you simply receive it for being a Canadian (or legal resident). OAS is based on the number of years you’ve lived in Canada and has nothing to do with CPP. The maximum OAS payment is currently $8,250 a year. The other components of retirement income include company pensions and your own savings.
Adding as much as $15,000 a year from CPP to your retirement income can make a big difference in terms of how much you need to save for retirement, so if you’re trying to figure out how much you need to be putting away, it’s important to know how much you will receive and factor it into the calculation. (You probably aren’t doing the detailed calculations yourself but online calculators can help or even better, get a personalized estimate from a financial planning person.)
There are many nuances to the CPP and you don’t need to know them all, but here are three things to understand about it:
1. Contributions - You will automatically contribute if you are employed by someone else. You see the deductions come off your paycheque until you’ve contributed the maximum for the year (which is $3,754 in 2023). Your employer contributes the same amount. If you are self-employed, you have a choice to contribute or not. If you do contribute, you have to pay both the employee and the employer’s portion (for a total of $7,509 this year).
2. Delaying or taking early - You don’t have to take your pension payment at age 65. You can take is as early as 60 and as late as 70. If you take it early, you’ll get a lower payment every month and if you take it late you’ll get more every month. What age you choose to start getting your CPP payment depends on several factors, like how long you plan on working, what other sources of income you have, and how long you expect to live.
3. The CPP is solvent. Some people worry that the CPP won’t have enough money to pay everyone in retirement. This is an old-fashioned concern that you should set aside. The actuaries – A.K.A the number crunchers – at CPP are all over this. They are well aware of the demographic composition of the Canadian population and have set the required contributions accordingly. Further, the money in the plan is managed by the CPP Investment Board, a group of investment professionals whose job it is to be obsessed with making sure the pension fund earns a return that will allow it to remain viable. It’s also crucial to understand that the money we contribute to the CPP can only be used to pay pensions – it cannot be used for any other purpose. The money is set aside and separated from other government assets. In short, you can count on the CPP being there for you, whether you’re retiring next year or in 35 years.
If you are a keener, here are some other nuances that you might want to learn more about:
If you took time out of the work force or had low earnings for a few years, you can drop some of those years from the calculation, boosting your annual payment.
If you have a spouse who receives CPP, you are entitled to a survivor benefit should they pass away.
CPP payments are taxable as regular income. You can choose to split your CPP with a spouse for tax reasons to possibly lower your household tax bill.
If you get divorced, one spouse may be entitled to a portion of the other spouse’s future CPP payments.
CPP payments are indexed to inflation; this means that every year your payment will go up to keep up with the cost of living.
Your payment will be lower by 0.6% for every month you take it before age 65. This equates to a 7.2% reduction in your payment for every year you take it early. If you choose to take CPP after age 65, you’ll get 0.7% more for every month you delay, or 8.4% per year.
That’s about all you need to know about the Canada Pension Plan. Now that you’re informed of the basics, consider your knowledge acquisition on the topic done.