CPP 101

A Brief History

CPP was established by Prime Minister Lester B. Pearson in 1965 and made law that all employed Canadians over the age of 18 years contribute a portion of their employment income (including self-employed income) to a federally administered pension plan.  The plan is administered by Employment and Social Development Canada on behalf of employees in all provinces and territories except Quebec which operates an equivalent plan, the Quebec Pension Plan.

CPP allows retirees to hedge against three key risks:

1. Longevity risk- With people living longer these days, there is an increased chance that their savings might run out before their deaths. CPP provides a steady income, no matter how long you live.
2. Inflation risk- Each year, the benefit is increased based on the CPI All-Items Index which helps keep retiree’s purchasing power intact.
3. Sequence of returns risk- If you’re drawing money from your investments during a market downturn, it can really hurt your long-term savings. CPP provides guaranteed income through all market conditions.

How much do employed people pay into CPP each year?

CPP deductions are a percentage of your income between $3,500 and the maximum pensionable earning.  For 2024, the maximum pensionable earning is $68,500. Up to that maximum an employed person pays 5.95% of his/her income.

How much can you receive from CPP?

The amount of your CPP retirement pension depends on different factors, such as:

• the age you decide to start your pension
• how much and for how long you contributed to the CPP
• your average earning throughout your working life

When the base component of your CPP is calculated, up to 8 of your lowest earning years will be omitted. For 2024, the maximum monthly amount you could receive if you start your pension at age 65 is $1,364.60.  You can find the details regarding your CPP contributions and payments on your My Service Canada Account. https://www.canada.ca/en/employment-social-development/services/my-account.html

Until 2019, the CPP retirement pension replaced one quarter of your average earnings from employment or self-employment up to the maximum earnings each year.  As of 2019, the CPP is gradually being enhanced to allow for higher contributions which will result in an increase in benefit amounts in retirement.

Pension Sharing

CPP is included in the calculation of taxable income. However, you can share up to half of this income with your spouse or common-law partner.  Pension sharing can lower your taxes in retirement by decreasing your taxable income.

Divorce or Separation

Credit splitting allows your CPP contributions to be split between you and your spouse or common-law partner if you divorce or separate.

Other CPP Benefits

• CPP Disability Pension
• Children’s Benefit – a monthly benefit for dependent children (under age 18 or between 18 and 25 and attending school full time) of disabled or deceased CPP contributors
• CPP Survivor’s Pension – If you are already receiving a CPP survivor’s pension when you start receiving your CPP pension, or vice versa, the two pensions are combined. The calculation for combining the two pensions follows specific rules and may not equal the sum of the two pensions.
• Death Benefit- If you die and are a CPP contributor, the death benefit provides a one-time payment to your estate. This is currently $2,500.

When do you receive CPP?

The standard age to start the pension is 65.  However, you can elect to start receiving it as early as age 60 or as late as age 70.  If you start receiving your pension earlier, the monthly amount you’ll receive will be smaller.  If you decide to start later, you’ll receive a larger monthly amount.  The maximum monthly amount you can receive is reached when you turn 70.  Once you start receiving the benefit, you can’t change it (unless it’s been less than a year), so it’s important to make an informed decision.

Taking CPP before 65: Your benefit will be reduced by 0.6% for each month, up to and including the month you reach 65 years of age. The maximum CPP reduction is 36%, which applies if you take the benefit the month after your 60^th birthday.  This might make sense if you need the funds for your expenses or if you have health issues or a family health history that suggests a shortened life expectancy.

Taking CPP after 65: Your benefit will increase by 0.7% for each month you delay receiving it after your 65^th birthday. If you begin your CPP payments in the month after your 70^th birthday your monthly benefit will be 42% higher than at age 65. This might make sense if you don’t need the funds for expenses, you are healthy and have a longer life expectancy and/or you are in a higher tax bracket at 65 and want to start the benefit when you have moved into a lower tax bracket.

Typically, the breakeven age – the point at which deferring benefits yields more than taking them early – falls in the mid-70s for those delaying from 60-65, and the early 80s for those delaying until 70.  Bonnie-Jeanne MacDonald, PhD and Director of Financial Security Research at the National Institute of Aging concluded that from the actuarial age-adjustment factors and the non-enhanced CPP benefits alone, an average Canadian receiving the median CPP income who chooses to take benefits at age 60 rather than age 70 is forfeiting over $100,000 (in current dollars) worth of secure lifetime income. From a lifetime perspective, the total amount of CPP/QPP income that an average Canadian will receive over the course of their retirement is over 50% more by delaying CPP from age 60 to age 70. ^[1]

To qualify for CPP you must:

• be at least 1 month past your 59^th birthday
• intend for your CPP to start within the next 12 months
• have worked in Canada and made at least one valid CPP contribution or received credits from a former spouse or common-law partner at the end of the relationship

How to apply for CPP?

You can apply online through your My Service Canada Account (MSCA) https://www.canada.ca/en/employment-social-development/services/my-account.html. You should receive a notice in the mail between 7 and 14 days.

You must complete and send a paper application to Service Canada if:

• you’re receiving, have ever received, or have been denied a CPP benefit, such as disability pension, survivor’s pension or a children’s benefit
• you live outside Canada
• you have an authorized third party such as a power of attorney that manages your CPP account

If you submit a paper application, it can take up to 120 days to get your written notification of decision.

Can you change your mind?

If you begin receiving CPP and then decide that you would prefer to defer payments, you can cancel your pension up to 12 months after you start receiving funds. You must request the cancellation in writing and you must also pay back all of the CPP income you have received. To cancel your benefit, contact Service Canada.

Understanding CPP is crucial for retirement planning, and knowing your options can help you make an informed decision about when to start receiving benefits. Whether you’re planning early, thinking about sharing your pension with a spouse, or considering deferral, CPP offers flexibility to suit a variety of financial needs. If you have any questions about your CPP contributions or payments, please don’t hesitate to contact your Wealth Manager.