Author: Tom Drake
The Canada Pension Plan (CPP) is a defined benefit pension plan administered by the federal government. Its purpose is to provide working Canadians with a source of guaranteed income when they retire.
How does CPP work?
While you are working, you contribute to the CPP through regular deductions from your paycheque. CPP payments can start as early as age 60, and last for the remainder of your life. Not everyone receives the same payment, however. Your CPP payment amount will depend on a number of factors, including how many years you contributed, and how much you earned while you were working.
Who contributes to the CPP?
If you are over 18 and working in Canada (outside of Quebec), it's very likely that you are contributing to the Canada Pension Plan. There are exceptions, which I'll explain in more detail later, but know that the vast majority of employed Canadians are contributing to the CPP.
What is the maximum CPP contribution for 2020
For 2020, the CPP contribution rate for employees is 5.25% on earnings between $3500 and $58,700. Employers are required to match the employee contribution of 5.25%, therefore the maximum contribution for 2020 is $2,898.00 each. If you are self-employed, you can also benefit from the CPP, but you are responsible to make both the employee and employer contribution while you are working.
Because CPP contributions cease on any income over $58,700, this is known as the maximum pensionable earnings amount (YMPE). This is why many workers see an increase in their take-home pay at some point during the year. CPP contributions have been maxed, and contributions are paused until the beginning of the following year.
But enough about CPP contributions. You're probably wondering how all of this benefits you when it comes to receiving CPP payments. Let's take a closer look at how the CPP works after you retire.
How will I benefit from CPP contributions?
By contributing to the CPP, you are ensuring the viability of important government benefits for when you need them later in life. Also, as your CPP contributions increase along with your income, you become eligible for a larger benefit when you begin receiving payments.
As a contributor to the CPP, there are 4 primary benefits you may become eligible for at some point in the future: retirement pension, the post-retirement benefit, disability benefits, and the death benefit.
The CPP retirement pension is a monthly benefit that is designed to replace a portion of your employment income after you retire. To qualify for a retirement pension, you have to be at least 60 years of age, and you must have made at least one eligible contribution to the CPP during your working years.
Your CPP payment is not triggered automatically. You must apply for it when you're ready to begin collecting benefits. Part of the reason for this is that you can choose when to start collecting CPP. You can receive an unreduced benefit at age 65, or opt for a lesser amount earlier. The benefit is reduced by a certain percentage for every month you begin collecting CPP before 65.
These days, more and more Canadians are choosing to continue working past age 60. When this happens, they can choose to collect their CPP while they continue to work. Any contributions they make up to age 70 will be designated towards their post-retirement benefits (PRB). CPP contributions stop at age 70, even if you continue to work.
If you are under 65 years old, have contributed to the CPP, and have a mental or physical disability, you may be eligible to receive a CPP disability benefit. Your disability must be severe enough that it prevents you from performing regular work duties, or be considered long term and indefinite, potentially resulting in a shortened life expectancy.
If you are receiving the disability benefit, and are the parent of a minor child, or an adult child between 18 and 25 attending a post-secondary institution, your child may be eligible to receive a benefit under the CPP. They can also receive a benefit if you were to pass away.
The CPP death benefit is a one-time payment made to the estate of a CPP contributor. When this occurs, the authorized estate representative is the one responsible for administering the death benefit on behalf of the estate.
In the absence of an estate (where there is no will, and an authorized representative has not been named, the party responsible for paying the funeral expenses is eligible to apply for and receive the death benefit, to assist with burial costs etc. All eligible contributors to the CPP receive a flat amount of $2500 as a death benefit.
What is the maximum CPP payment for 2020?
If you were eligible to receive the maximum CPP payment in 2020, you would receive $1175.83/month, or $14,109.96/year. Unfortunately, most Canadians receive a lesser amount, in fact, the average monthly CPP payment is closer to $650.
There are a few reasons for this, with the main one being that it's not easy to maximize your contributions during your working years. Another factor is that many Canadians apply for the CPP prior to age 65, resulting in a reduced monthly benefit.
To qualify for the maximum CPP payment, you would need to have made CPP contributions for at least 39 years between ages 18 and 65. You would also need to maximize contributions for the majority of your working years by earning the maximum pensionable earnings amount ($58,700 in 2020).
When is the CPP paid each month?
CPP payments are paid out on the 3rd business day prior to the end of every month. These days, most Canadians receive the funds via direct deposit into their bank account. I wrote an article recently that lists theCPP payment dates for 2020.
When should I start collecting CPP?
There is no perfect answer to this question, as everyone's situation is different. If you wait until age 65 to begin collecting CPP, you will receive an unreduced monthly benefit. You can choose to collect as early as age 60, or anywhere in between, but your benefit will be reduced for every month before age 65.
If you have other ample income sources and don't require the CPP to meet your day-to-day living requirements, it may be beneficial to wait until age 65. On the flip side, if you are retiring before 65, and are relying on the CPP to supplement your retirement income, it may be better to take it early.
These are merely guidelines, however. There are those who believe that it's best to begin collecting CPP as soon as you qualify, given that our lifespan is uncertain. While people are living longer than ever these days, nothing is guaranteed.
Before applying for the CPP, I highly recommend that you consult with a retirement planning professional who can help you make the best decision.
How do I apply for CPP?
The fastest way to apply for CPP is by filling out an application online. According to the CRA, the turnaround time for online applications is between 7 and 14 days. You can also apply in-person at a Service Canada location or by mail, but the processing time is much slower this way, as long as 4 months. Regardless of the method you choose, it's always a good idea to apply well in advance of when you plan to begin receiving CPP benefits.
Upcoming changes to CPP contribution rates
To ensure that the CPP program is sustainable for future generations, the federal government recently announced changes to CPP contribution rates in future years. As I previously mentioned, the contribution rate for 2020 is 5.25%, but this will rise to 5.95% by 2023.
Beginning in 2024, a new upper limit will be introduced, and employees making more than the YMPE will need to contribute 4% on earnings between that amount and the new upper limit. The full benefit of these changes will not be realized until 2065, but increases will begin well before that date.
Final thoughts on CPP payments
Even if you are eligible for the maximum CPP payment when you retire, it won't be close to enough for a comfortable retirement. In other words, you can't ignore other forms of retirement savings. Include the CPP in your retirement planning, but make sure you're also contributing to yourRRSP,TFSA, as well as a company pension plan if you have one.
The more you put in, the more you'll get out. The average CPP benefit in January 2021 is $619.75 per month. The maximum amount you could receive as a new recipient starting at age 65 is $1,253.59. To receive the maximum CPP amount you must contribute to the CPP for at least 39 of the 47 years from ages 18 to 65.How does CPP work when you retire? ›
The amount you receive each month is based on your average earnings throughout your working life, your contributions to the CPP, and the age you decide to start your CPP retirement pension. Your contributions to the CPP are based on your earnings. The standard age to start the pension is 65.How does CPP contribution work? ›
Contributions to CPP are compulsory for all working Canadians aged 18-70. Employees and employers contribute equally on earnings that are between the Basic Exemption amount and the Year's Maximum Pensionable Earnings (YMPE). In 2022, contributions on those earnings are 5.7% by employees and 5.7% by employers.How much CPP will I get if I retire at 60? ›
The maximum payment amount for taking CPP at age 65 is $15,043 per year (2022). That amount would be reduced to $9,627.52 per year if you elect to take CPP at 60.Is it better to collect CPP at 60 or 65? ›
You can take CPP as early as age 60, but you will receive fewer benefits than if you wait. If you wait until your 65th birthday, you will receive your full benefits. You can also choose to delay your benefits until age 70, which grants you extra benefits.Does everyone get the same amount for CPP? ›
In other words, not everyone gets the maximum. At the most basic level, the amount you get from CPP depends on how much you put into CPP. The best way to figure out how much CPP you qualify for is to get your CPP statement of contributions.Do you get CPP back when you retire? ›
If you apply after you turn 65, you can get retroactive payments of the CPP retirement pension for up to 11 months. The start date you choose to begin receiving your benefit will affect how much you'll receive each month. There are no retroactive payments for a CPP retirement pension taken before age 65.Will the CPP exist when I retire? ›
Will the CPP be there for Canadians when they retire? Every three years, Canada's Chief Actuary conducts an independent review of the sustainability of the CPP over the next 75 years. Its latest review reaffirmed that each part of the CPP remains sustainable at the legislated contribution rates.Should I stop contributing to CPP after 65? ›
You may continue to work while receiving your CPP retirement pension. If you are between ages 60-70, you can continue to contribute to the CPP. Your CPP contributions will go toward post-retirement benefits, which will increase your CPP retirement income.When should I stop contributing to CPP? ›
You cannot elect to stop contributing to the CPP until you are at least 65 years of age. The earliest month an election can take effect is the month you turn 65. For example, if you turn 65 in July 2022 the earliest month an election can take effect is July 2022.
|Year||Maximum annual pensionable earnings||Employee and employer contribution rate (%)|
The employee and employer contribution rates for 2023 will be 5.95%—up from 5.70% in 2022, and the self-employed contribution rate will be 11.90%—up from 11.40% in 2022. The increase in contribution rate is due to the continued implementation of the CPP enhancement.How much should a 60 year old retire with? ›
How much retirement should I have at 60? A general rule for retirement savings by age 60 is to aim to have about seven to eight times your current salary saved up. This means someone earning $75,000 a year would ideally have between $525,000 to $600,000 in retirement savings at that age.Is it better to take CPP at 65 or 70? ›
There's a strong incentive for deferring your CPP benefits past age 65. You'll receive 8.4% more each year that you delay taking CPP (up to a maximum of 42% more if you take CPP at age 70). Note there is no incentive to delay taking CPP after age 70.What happens to my CPP if I retire at 55? ›
You will only continue to get the age-adjusted increase. If you retire early, let's say at 55, and do not make any more contributions then your CPP is being reduced for every month of delay past age 60.What is the average CPP monthly payment? ›
|Type of pension or benefit||Average amount for new beneficiaries (July 2022)|
|Post-retirement disability benefit||$524.64|
|Survivor's pension – younger than 65||$469.47|
|Survivor's pension – 65 and older||$316.05|
|Children of disabled CPP contributors||$264.53|
|Type of pension or benefit||Average monthly amount for new beneficiaries (as of October 2019)||Yearly Average Amount|
|Retirement pension, age 65+||$679.16||$8,149.92|
|Retirement pension, delayed to age 70||$964.40||$11,572.89|
Many Canadians retire around age 65 since that's when government retirement benefits such as Old Age Security (OAS) are designed to start.Can I collect both CPP and OAS? ›
You can, in fact, receive your Canada Pension Plan (CPP) retirement pension and your Old Age Security (OAS) pension while still working, but there are some important considerations. You can start CPP as early as age 60; if you're still working at that point, you need to keep contributing to CPP.Can I collect both CPP and Social Security? ›
A CPP/QPP pension may affect your U.S. benefit
If you qualify for Social Security benefits from the United States based only on U.S. credits and a CPP/QPP benefit from Canada, the amount of your U.S. benefit will be reduced.
Key Takeaways. Both the Canada Pension Plan (CPP) and Social Security are government-sponsored retirement income programs. CPP tax rates and income thresholds are generally lower than those of Social Security. Benefits also tend to be lower.What will I get when I retire? ›
Your retirement benefit is based on how much you've earned over your lifetime at jobs for which you paid Social Security taxes. Your monthly retirement benefit is based on your highest 35 years of salary history. You can get your earnings history from the Social Security Administration (SSA).How many years do you have to work to get a pension? ›
To be eligible for service retirement, you must have at least five years of CalPERS-credited service and be at least age 50, 52, or 55 depending on your retirement formula . If you have a combination of classic and PEPRA service, you may be eligible to retire at age 50 .
If you owe taxes to CRA and you receive CPP or OAS, CRA can withhold some or all of your monthly pension payments. Contact Rumanek & Company Ltd. for more information on bankruptcy and debt solutions.Is it better to delay CPP or OAS? ›
Old Age Security (OAS) benefits
Unlike CPP, you cannot apply to receive OAS benefits before the age of 65. With both OAS and CPP, you will receive a higher monthly amount if you defer collecting these pensions beyond age 65. The maximum deferral age for both is age 70. We will go through the numbers for OAS below.
Receiving CPP at 60 means giving up 36% of your standard retirement pension. On the other hand, there's an incentive to defer past age 65 to the tune of 0.7% per month, or 8.4% annually. If you wait until age 70 to collect, you can raise your payment by 42%.Can I collect CPP at 60 and continue to work? ›
Overview. If you continue to work while receiving your CPP retirement pension, and are under age 70, you can continue to participate in the CPP. Your CPP contributions will go toward post-retirement benefits (PRB), which will increase your retirement income.Can you contribute to CPP while collecting CPP? ›
If you work while receiving your CPP retirement pension and are under age 70, you can still make CPP contributions. Each year you contribute to the CPP will result in a post-retirement benefit and increase your retirement income. We will automatically pay you this benefit the following year.Is the Canadian government giving extra money to seniors 2022? ›
A 10 per cent increase to the Old Age Security (OAS) pension for seniors 75 years and older, which began in July 2022, and will provide more than $800 in new support to full pensioners over the first year, and increase benefits for more than three million seniors.Will CPP payments to seniors increase in 2022? ›
CPP payments throughout 2022 saw a 2.4 per cent increase from last year, based on inflation calculated from October 2020 to October 2021. In July, the government also announced pensioners receive a 10 per cent increase in their monthly income when they reach the age of 75.
Based on this formula, the 2022 CPP rates increased by 2.7%, even though inflation was at 3.4% by the end of 2021. In 2023, we'll likely see a similar thing occur.How much money do you need to retire comfortably in Canada? ›
3) What will my expenses be? The general wisdom is that you will need 70 to 80 percent of your current salary to maintain a similar lifestyle in retirement. That means if you made $100,000 each year, you should plan to have $70,000 to $80,000 in retirement income, for example.What is a good retirement amount at 65? ›
We estimated that most people looking to retire around age 65 should aim for assets totaling between seven and 13½ times their preretirement gross income.How much do you need saved to retire at 65? ›
Retirement experts have offered various rules of thumb about how much you need to save: somewhere near $1 million, 80% to 90% of your annual pre-retirement income, 12 times your pre-retirement salary.Is CPP changing to age 67? ›
Starting on April 1, 2023, the age of eligibility for OAS and GIS benefits will be gradually increased from 65 to 67, with full implementation by January 2029.Is it a good idea to take your pension at 55? ›
You might be able to start receiving an income from it at age 55. However, the income you get is likely to be reduced, as you're taking it earlier than the normal pension age of the scheme. Equally, if you begin taking money from it later, you could get a higher income.What is the break even point for CPP? ›
Your breakeven age is 75. If you don't expect to live past 75, you may be better off taking CPP benefits at age 60. If you expect to live past 75, you may be better off taking CPP benefits at age 65. This table shows the present value of CPP benefits at age 60 using a rate of return of 4.00%.Can you retire on CPP and OAS? ›
The Canada Pension Plan (CPP) and Old Age Security (OAS) are guaranteed incomes for life but not necessarily enough to live comfortably in retirement. Assuming you're 65 today and are starting payments for both, the combined total is $1,345.32 every month.Which is better CPP or Social Security? ›
CPP tax rates and income thresholds are generally lower than those of Social Security. Benefits also tend to be lower. Taxed Canadian wages go into a trust fund managed by the CPP Investment Board, which invests the funds in stocks, bonds, and other assets.What is the maximum CPP payout for 2022? ›
For 2022, the maximum monthly amount you could receive as a new recipient starting the pension at age 65 is $1,253.59. The average monthly amount paid for a new retirement pension (at age 65) in July 2022 is $737.88.
CPP pension sharing can also result in tax savings for the sharing couple. While it will not increase the overall amount that either or both spouses may receive, it may help save on their tax liability. So, CPP splitting might make sense for you.