The Canada Pension Plan (CPP)

This is meant to provide a quick overview of how the Canada Pension Plan (CPP) works for most Canadians. For retirement planning purposes, please refer to the official government documentation.

I’m going to focus on the CPP as it exists today. The CPP is being enhanced, but with contributions being phased in between 2019 and 2025, maximum enhanced CPP payments will only be available to those retiring in 2065 or later.

In addition to workplace pensions and personal retirement savings, most Canadians will receive income from two public programs in retirement: the CPP and the Old Age Security (OAS) pension.

Unlike the OAS pension, where eligibility is based on years of residency in Canada, eligibility for CPP depends on contributions throughout your working life. These contributions are generally mandatory, even for the self-employed.

CPP is meant to replace up to 25% of average career earnings from age 18 to 65, although annual earnings are capped ($58,700 in 2020). Your 8 lowest earning years are dropped from the calculation, so you need to earn at least as much as the earnings cap for 39 years (the calculation is actually monthly) in order to qualify for the maximum CPP pension. Months where you took time off work to raise children, or due to a disability, can also be dropped from the calculation.

The typical age to apply to receive CPP is 65, but you can apply to receive it any time between the ages of 60 and 70. Unlike OAS, there is no clawback above a certain income threshold. This is because you have paid into CPP throughout your working life. It is not funded through federal tax revenues.

If you applied to received CPP at the age of 65, the maximum pension you could receive today would be $1,176/month ($14,110/year). But, because the payment depends on average career earnings, and not everyone makes as much as the pensionable earnings cap for 39 years, the average amount is $735/month ($8,823/year). These payments are adjusted once a year to keep up with inflation.

If you apply to receive CPP between 60 and 65, your payments will be 0.6% lower for every month you receive it before age 65. If you took it at 60, that would be a decrease of 36%, and the maximum pension you could receive today would be $752/month ($9,030/year). As long as you live to at least 74, you will collect more by waiting to take CPP at 65 (vs. 60)

You can also wait until the age of 70 to start taking CPP. For every month you wait past 65, your payments will increase by 0.7%. This could also increase your pension amount if you keep working past 65, as you may have additional high earnings contribution years. If you wait until 70, the maximum pension would increase by 42%. If you applied to receive CPP at the age of 70, the maximum pension you could receive today would be $1,670/month ($20,036/year). As long as you live to at least 82, you will collect more by waiting to take CPP at 70 (vs. 65).

As you can see, your CPP payment will be very different if you take it at 60 vs 70 (maximum of $9K/year vs. $20K/year). Waiting until 70 to start collecting both CPP and OAS could result in a maximum combined income of just over $30,000 per year — an income that is indexed to inflation and guaranteed for life.

That on its own could fund a comfortable retirement in parts of Canada, or it could be an excellent complement to an investment portfolio. For some perspective, the median annual employment income in the Maritimes was only $32,000 in 2018.

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