What is a CPP?
The Canada Pension Plan (CPP) is a public pension plan designed to provide contributors and their beneficiaries with partial replacement of earnings upon retirement. It was created in 1965 in response to a growing number of retirees living below the poverty line. At the beginning, the CPP’s objective was to cover 25% of a worker’s average lifetime earnings, up to a stated maximum benefit. Since then, the objective has changed to cover 33% of average lifetime earnings.
Every worker in Canada is required to contribute to CPP, with the exception of those working in Quebec. Quebec workers are covered by a similar program, called the Quebec Pension Plan (QPP).
Canada Pension Plan Investment Board (CPPIB)
CPP was originally financed through payroll deductions alone, collected from both employers and employees. Today, however, the CPP earns investment income in addition to payroll deductions. The CPPIB is tasked with investing CPP funds and ensuring its ability to meet future obligations. As of March 31st, 2018, the CPPIB managed $356.1B, representing 20 million Canadian contributors and beneficiaries. Over the last 10 years, the CPPIB has grown the CPP Fund by an average of 8% annually (net nominal). Click HERE to see the latest CPP Performance information. Earning investment income is critical to the CPP’s long-term viability now more than ever. According to Statistics Canada (2018), the share of seniors in Canada will increase from 15 per cent to more than 25 per cent from 2010 to 2063. (Click HERE for the latest forecasts from Stats Canada on this topic.) Therefore, the share of workers in comparison to those in retirement will see a sharp decline. In order to offset this imbalance, the CPPIB must continually earn a return on CPP funds.
Historic CPP Contribution Rates, Maximums and Exemptions
As we can see from the chart below, in 2018, 9.9% (split equally between worker and employer) of annual earnings between $3,500 (Basic Exemption Amount) and $55,900 (Maximum Annual Pensionable Earnings) is contributed to the CPP Fund. Self-employed individuals pay double, as they are both the worker and employer.
|Year||Maximum annual pensionable earnings||Basic exemption amount||Maximum contributory earnings||Employee and employer contribution rate (%)||Maximum annual employee and employer contribution||Maximum annual self-employed contribution|
How Much to Expect
In 2016, the average annual CPP pension for a 65-year old was $7,728, compared to the maximum amount of $13,368. CPP contributors can choose to start receiving CPP benefits at any point between the ages of 60 and 70, with the standard being 65 years of age. Annual pension benefits are adjusted up or down based on the age in which you choose to draw your pension. Your CPP pension is reduced by 0.6% for each month you receive benefits before the age of 65 (7.2% per year). On the other hand, your CPP pension increases by 0.7% for each month that you delayed benefits up until age 70 (8.4% per year).
You can also choose to have taxes withheld from monthly payments to avoid owing tax at year end. In order to do so, you must fill out the voluntary income tax deduction form and mail it to Service Canada. You can access the form by clicking here.