Canada Pension Plan

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Retirement planning
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The Canada Pension Plan (CPP) provides contributors and their families with retirement, disability, survivor, death and children’s benefits. It is an example of a defined benefit pension plan. The Canada Pension Plan operates throughout Canada with one exception, the province of Quebec has their own Québec Pension Plan (QPP) that is similar to the Canada Pension Plan.

The assets of the CPP are managed by the CPP Investment Board (CPPIB). The CPPIB dates back to 1997 when an Act of Parliament[1] created the organization to manage and invest the CPP Fund to help ensure the long-term sustainability of the Canada Pension Plan.[2]

Contribution information

With very few exceptions, every person in Canada (outside of Quebec) between the ages of 18 and 70 who earns a salary must pay into the Canada Pension Plan.[3]

Base plan

Contributions are made on employment income above $3500, the basic exemption, and up to yearly maximum pensionable earnings (YMPE) of $66,600 in 2023 and $68,500 in 2024.[4]

You and your employer each pay half of the contributions. In 2023 and 2024 this is 5.95% of "pensionable" earnings, i.e. earnings between the basic exemption and the YMPE, for both the employee and the employer.[4]

If you are self-employed, you pay both portions, for a total of 11.9% for 2023 and 2024.[4] In this case, contributions are based on your net business income (after expenses). You do not contribute on any other source of income, such as investment earnings.

Enhancement

A portion of the contribution rate just mentioned will be used to fund the CPP enhancement on income ranging up to the YMPE, also known informally as the "first earnings ceiling”.[5]

Additionally, beginning January 1, 2024, contributions will also be paid on employment income between the YMPE and the year's additional maximum annual pensionable earnings (YAMPE or informally, the "second earnings ceiling") of $73,200 (for 2024).[6] For 2024, the rate is 4% for both the employee and the employer. [6] Self-employed people will pay 8%.

Applying for CPP benefits

You are required to apply to receive CPP benefits. If you made CPP contributions the year before starting your pension, make sure they do an adjustment once the pension is in pay.

When you apply for CPP you must confirm your personal information and provide banking information for direct deposit and the date when you'd like your pension to begin.[7] You can apply a maximum of 12 months before the date you would like your pension to start.If you are 65 years plus 1 month or older, you can request retroactive payments for a maximum of 11 months, or back to your 65th birthday plus 1 month—whichever is shortest.[7]

The application for CPP is online, by signing in or registering for a My Service Canada Account (MSCA).[8] Not everyone can apply online as the application procedure excludes a number of cases.[8] If you have applied online, you will receive a letter within a month confirming your eligibility, your start date and the amount you will receive.[9]

For the latest information, your best resource is the Government of Canada's Canadian Pension Plan - Overview.

Pension sharing

The CPP allows retirement pension sharing between spouses or common-law partners.[10] The portion of your pension that can be shared is based on the number of months you and your spouse or common-law partner lived together during your joint contributory period. Pension sharing can reduce the total income tax owned for the couple. There is a separate form to apply for pension sharing.

Retirement pension

The retirement pension[11] is a monthly payment available to CPP contributors beginning as early as 60 years of age or as late as age 70.

Your pension is based on your contribution history, how much you have contributed and how long you have contributed. There is some protection built into the CPP system for low-earning years, via the general drop-out provision,[12] and the child rearing provision,[13] which must be requested.

Base CPP aims to replace 25% of the earnings on which the worker contributed, assuming retirement at age 65. To get the maximum CPP pension, a worker must have earned the YMPE or more for 39 years between age 18 and age 65[14] so most people do not get the maximum pension. For example, in 2020 the maximum was $1155 per month but the average pension was $679.[15] The 39 years are based on the general drop-out provision, which allows 17% of the lowest income months to be dropped from the calculation.[16]

Enhanced CPP is designed to upgrade the 25% figure to 33.33% of earnings.[17] However this will happen progressively over a 45 year period, to year 2065.[18]

When to claim it

The "normal" age to claim your CPP pension is 65. Retirement earlier or later than 65 will decrease or increase the monthly pension, respectively. Benefits do not increase beyond age 70 so there is no reason to wait later.

Claiming CPP early

If you need the income, or if your life expectancy is low, you may be a candidate for taking CPP as early as possible.[19] Early retirees are also possible candidates because this reduces the number of "zero work income" years in their record. But each situation is different and you are encouraged to simulate different scenarios.

Delaying CPP

In 2012, less than 4% of new CPP recipients were 66 or older.[20]. But delaying the start of your CPP pension, and perhaps Old Age Security (OAS), has the effect of significantly increasing the yearly benefits payable.[21] These benefits are indexed to the cost of living and are guaranteed to last until death. Therefore, by drawing down other sources of income sooner, to make up for the shortfall created by the delay in CPP and/or OAS, the retiree is making a choice equivalent to the purchase of an indexed life annuity. This decreases longevity risk, and may allow the retiree to enjoy a greater total income in early years.[22] Good candidates for this strategy will have no bequest motives, no cash-flow issues, and will be in above-average health.[23] According to Tim Cestnick, one must live beyond the age of 81 to justify, mathematically, delaying CPP to age 70.[24] See also this blog post.

Delaying CPP is further discussed under Delaying government pensions and benefits.

DIY calculations

Step-by-step instructions on how to calculate your CPP pension are given by Doug Runchey.[16]

CPP Calculator

See the CPP and QPP calculator.

Other CPP benefits

Disability benefits

The disability benefit[25] is a monthly benefit available to qualified CPP contributors and their dependent children.

Survivor benefits: overview

Survivor benefits[26] are paid to a deceased contributor’s estate, surviving spouse or common-law partner and dependent children. Benefits include:

  • The death benefit – a one-time payment of up to $2,500 to, or on behalf of, the estate of a deceased Canada Pension Plan contributor;
  • The survivor's pension – a monthly pension paid to the surviving spouse or common-law partner of a deceased contributor.
  • The children's benefit – a monthly benefit in 2024 of $294.12 for dependent children of a deceased contributor.[27]

Survivor pension

The survivor pension can be a notable component of financial planning, for a couple.[28] The amount paid depends on how much, and for how long, the deceased contributor has paid into the CPP, as well as the age of the survivor.[28]

  • Maximum monthly benefits in 2024 are $739.31 for individuals younger than 65 and $818.76 to those 65 and over[27];
  • The average survivor pension for ages 65 and over is $326.87 per month for new beneficiaries, in 2024, i.e. much lower than the maximum[27]

In the absence of other CPP benefits being received:[28][29]

  • Before the age of 65, the calculation for the base plan involves a flat rate portion, plus 37.5% of the deceased contributor's retirement pension.
  • At ages 65 and up, for the base plan, the survivor pension is 60% of the deceased contributor's retirement pension.

The CPP enhancement will add to the survivor pension somewhat.

If several CPP benefits are being received (retirement pension, disability pension, survivor pension), they will be combined into a single payment. For example, when combining a retirement pension and a survivor pension, the most that can be paid "is the maximum retirement pension".[28] However, the survivor can get a larger combined monthly amount by waiting until age 70 to claim their own CPP retirement pension.[30]

Payment information

Canada Pension Plan payments are taxable income.

Payment rates

Canada Pension Plan rates[31] are adjusted every January if there are increases in the cost of living as measured by the Consumer Price Index.[32]

Payment dates and direct deposit

If you have not requested payment by direct deposit, your payment will arrive at your home address by mail during the last three banking days of each month.[33] You can request payment by direct deposit, which automatically deposits your Canada Pension Plan and Old Age Security payments into your bank account in Canada, the United States, or in a number of other countries.[34]

Financial situation of the Plan

By design, CPP is only partly funded, i.e. outflows are paid mostly from new contributions, but can also come from investment income derived from the CPP fund.

As of March 31st, 2021, the CPP fund value was $497.2 billion.[35] The CPP fund's asset allocation at that date was about 56% public and private equities, 23% fixed income, cash and "absolute return strategies" and 21% "real assets" (mostly real estate and infrastructure).[35]

In the recent triennial review released in 2019,[36] the Chief Actuary of Canada reaffirmed that the base CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report. The contribution rates for additional CPP are also deemed appropriate. The Chief Actuary's projections are based on the assumption that the Fund will attain a 3.95% real rate of return for base CPP and 3.38% for additional CPP. This takes into account the impact of inflation.

Balwin (2020) notes that the Chief Actuary's conclusions are based on "best-estimate assumptions about the future", including investment returns and several other variables.[37] If the future differs from these best-estimate assumptions, the contribution rates needed to keep the plan healthy may be lower or higher than the current legislated rates. In other words, a negative experience could lead to higher contribution rates or lower benefits.[37]

See also

References

  1. ^ Canada Pension Plan Investment Board Act, viewed February 14, 2014.
  2. ^ Our History | CPPIB | Canada Pension Plan Investment Board, viewed February 14, 2014.
  3. ^ Government of Canada, Contributions to the Canada Pension Plan, viewed December 19, 2021.
  4. ^ a b c Canada Revenue Agency, CPP contribution rates, maximums and exemptions, viewed December 19, 2021.
  5. ^ Jamie Golombek, Higher-income earners will soon contribute more to CPP, but get more too, Financial Post, November 9, 2023, viewed December 4, 2023.
  6. ^ a b Canada Revenue Agency, Second additional CPP contribution (CPP2) rates and maximums, viewed December 4, 2023.
  7. ^ a b Government of Canada, Canada Pension Plan – What you need before you start, viewed January 10, 2016.
  8. ^ a b Government of Canada, Canada Pension Plan - Apply, viewed January 10, 2016.
  9. ^ Government of Canada, Canada Pension Plan - After you’ve applied, viewed January 10, 2016.
  10. ^ Government of Canada, Pension Sharing, viewed December 24, 2016
  11. ^ Service Canada, Canada Pension Plan - Eligibility - Canada.ca, Viewed 23 December 2016
  12. ^ General Drop-out Provision - Canada Pension Plan - Service Canada viewed February 14, 2014.
  13. ^ Child-Rearing Provision - Canada Pension Plan - Service Canada, viewed February 14, 2014.
  14. ^ Jim Yih, CPP Payments: How much will you get from Canada Pension Plan in Retirement?, viewed December 19, 2016
  15. ^ Government of Canada, CPP Retirement pension -- Overview, viewed December 19, 2021.
  16. ^ a b Doug Runchey, How to calculate your CPP retirement pension, viewed December 19, 2016
  17. ^ Government of Canada, Canada Pension Plan enhancement, viewed December 19, 2021.
  18. ^ Doug Runchey, Understanding and calculating the “Enhanced CPP” changes, updated December 18, 2019, viewed December 19, 2021.
  19. ^ Doug Runchey, When should I start taking my CPP?, DR Pensions Consulting, viewed December 19, 2016
  20. ^ Adam Mayers, Should you claim CPP at 60 or wait until 70, Toronto Star, January 30, 2013, viewed December 19, 2016)
  21. ^ MacDonald BJ (2020) Get the Most from the Canada & Quebec Pension Plans by Delaying Benefits: The Substantial (and Unrecognized) Value of Waiting to Claim CPP/QPP Benefits. National Institute on Ageing, Ryerson University, 70 p.
  22. ^ Fred Vettese, Why you should wait until you are 70 to collect CPP benefits, National Post, October 16, 2016, viewed December 14, 2016.
  23. ^ John Heinzl, The boomer’s dilemma: When to start collecting CPP?, The Globe and Mail, November 6, 2015, viewed December 19, 2016
  24. ^ Tim Cestnick, How to time the collection of CPP and OAS, The Globe and Mail, September 25, 2015
  25. ^ Service Canada, Disability Benefit, Viewed July 16, 2009
  26. ^ Service Canada, Survivor Benefits, Viewed July 16, 2009
  27. ^ a b c Canada Pension Plan pensions and benefits - Monthly and maximum payment amounts January to December 2024, viewed April 19, 2024.
  28. ^ a b c d Employment and Social Development Canada, Survivor's pension, viewed April 19, 2024
  29. ^ Doug Runchey, Understanding CPP survivor benefits, retirehappy.ca, updated February 8, 2023, viewed April 21, 2024.
  30. ^ Doug Runchey, A case study on CPP combined benefits, retirehappy.ca, updated February 8, 2023, viewed April 21, 2024.
  31. ^ Service Canada, Canada Pension Plan (CPP) - Payment Rates, Viewed July 16, 2009
  32. ^ Service Canada, Canada Pension Plan Rates and the Consumer Price Index, Viewed July 16, 2009
  33. ^ Service Canada, Old Age Security and Canada Pension Plan payment dates - Service Canada, viewed December 30, 2013.
  34. ^ Service Canada, Direct Deposit - Frequently Asked Questions, viewed July 22, 2012.
  35. ^ a b CPPIB Fiscal 2021 Annual Report, viewed January 8, 2022.
  36. ^ Actuarial Report (30th) on the Canada Pension Plan As at 31 December 2018, viewed January 8, 2021.
  37. ^ a b Balwin B (2020) Sources of Comfort and Chills: What We Can Learn from CPP Valuation Reports, CD Howe Institute, Commentary 587, isbn 978-1-989483-53-4, 19 p.

Further reading

External links

  • Canada Pension Plan (CPP) - Service Canada
  • Canada Pension Plan - Wikipedia
  • Runchey, Doug. "How to calculate your CPP retirement pension". retirehappy.ca.
  • Runchey, Doug. "Understanding the "Enhanced CPP" changes". retirehappy.ca.
  • Vettese, Frederick (March 5, 2017). "Want your money to go further in retirement? Defer CPP until age 70". The Globe and Mail.
  • "CPP Calculator with 2016 Changes". Blessed by the Potato. December 16, 2016. includes an Excel spreadsheet to estimate CPP payouts.
  • Government of Canada (Open Government Portal), Canada Pension Plan (CPP) - Number of New Retirement Pension by Age, Gender and by Calendar Year
  • Rosemary Counter (2023-02-01). "CPP and OAS: How the financial supports affect your retirement plans". The Globe and Mail.
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