Canada Pension Plan, understanding the basics
By Linda Lamarche 18 November 2019 4 min read
Whether you are just entering the workforce or retirement is right around the corner, it’s important to understand the benefits the Canada Pension Plan (CPP) provides and the contributions that you make for those benefits. CPP provides workers and their families with a basic level of income in the event of retirement, disability or death.
How CPP contributions work
CPP benefits are financed by compulsory contributions made through payroll deductions from your pay cheque, or if you are self-employed, through direct payments to the Canada Revenue Agency (CRA). Most individuals who are employed in Canada will contribute to CPP (or the Quebec Pension Plan for those that work in Quebec).
If you are 18 or older and earning more than $3,500 per year, CPP contributions are required by both you and your employer. Contributions are based on a percentage of your income (excluding the first $3,500) up to a certain income level. This income level is referred to as the yearly maximum pensionable earnings (YMPE), and is currently set at $57,400. The percentage amount for 2019 is 5.1%. As a result, the 2019 maximum employee and employer annual contribution to CPP is $2,748.90. If you are self-employed, you are required to pay both the employee and employer contributions.
What you need to know about the CPP retirement pension
The most well known benefit that the CPP program provides is the CPP retirement pension. If you are at least 60 years of age, have worked in Canada and have made contributions to the CPP program, then you are eligible to receive a CPP retirement pension.
The amount of CPP retirement pension you will receive is based on both your contribution history and the age at which you elect to start receiving your payments. If you elected to receive your CPP at age 65 in 2019, the maximum that can be received is $1,154.58 per month. However, to receive this amount, you would generally have needed to contribute the maximum amount in at least 39 years since turning 18. As a result, if you had low income in your younger years, while attending school, or for other reasons, you may not qualify for the maximum CPP retirement benefit. That being said, if you were out of the workforce to raise children under the age of seven, there is a child-rearing provision available which will adjust your required contributory period.
Generally, age 65 is considered the normal retirement age for government benefits and when you are eligible to receive 100% of your CPP entitlement. You can obtain your Statement of Contributions and an estimate of your CPP retirement pension by logging in to your My Service Canada account or by calling Service Canada at 1-800-277-9914.
Although the normal retirement age is 65, you can apply for your CPP retirement pension as early as age 60 or as late as age 70. The amount of your pension will be adjusted as you will receive more payments over your lifetime if you elect to receive your CPP retirement pension early, and less payments over your lifetime if you defer your CPP pension.
For each month your pension is received prior to age 65, the amount you are entitled to will be decreased by 0.6% (which means a reduction of 36% if started at age 60). Your payments will be increased by 0.7% for each month your CPP retirement pension is deferred (an increase of 42% if elected at age 70). There are many factors to consider in deciding when to start receiving your CPP retirement pension.
It’s also important to note that your CPP retirement pension is taxable and your pension amount will be adjusted each January for any previous year’s increase in the Consumer Price Index.
Recent enhancements to the CPP
Previously, the CPP was intended to replace ¼ of an individual's average working earnings (up the YMPE) each year of retirement. Beginning in 2019, changes are being implemented to CPP contributions with the intent that CPP retirement pensions will eventually replace ⅓ of an individual’s average working earnings and with an increased limit.
These changes are being implemented through a gradual increase in premiums from the current 5.1% to 5.95% by 2024. Beginning in 2024, employees and employers will also contribute 4% on earnings between the original earnings limit and the additional earnings limit.
The enhancement of the CPP program is a long-term strategy intended to address concerns for future retirees that may not otherwise be financially prepared for retirement, especially those who do not have access to an employer pension plan. In order to receive the full enhanced CPP benefit, individuals will have to contribute to the enhanced CPP for 40 years.
Ensuring you understand the CPP benefits that will be available to you is an important part of planning for your future, and while retirement planning may seem complicated, an ATB Wealth advisor can ensure you are on the path to a financially sound and fulfilling life in retirement.
ATB Wealth consists of a range of financial services provided by ATB Financial and certain of its subsidiaries. ATB Investment Management Inc., ATB Securities Inc., and ATB Insurance Advisors Inc. are individually licensed users of the registered trade name ATB Wealth. ATB Securities Inc. is a member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada.