Ryan O’Leary is a writer and former financial services professional. He writes about personal finance for Wealthsimple and his work has been featured by the New York Stock Exchange. Ryan holds a Bachelor's degree in International Business from University College Cork in Ireland.
The Canada Pension Plan (CPP for short) is a monthly, taxable benefit that replaces part of your income when you retire. It forms one of the two major components of Canada’s public retirement income system, the other component being Old Age Security (OAS).
If you qualify, you’ll receive the CPP retirement pension from as early as 59 years old for the rest of your life.
CPP was established by the Liberal government of Prime Minister Lester B. Pearson in 1965. CPP mandates all employed Canadians who are 18 years of age and over to contribute a prescribed portion of their earnings 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.
If the recipient dies, survivors receive the plan’s provided benefits.
Like the U.S. Social Security system, CPP requires mandatory pay-as-you-go contributions by all workers, including self-employed individuals. Valid contributions can be either from work you did in Canada, or as the result of receiving credits from a former spouse or former common-law partner at the end of the relationship.When it comes to retirement planning, the sooner you start, the more time your money has to grow. In just five minutes we’ll build a personalized investment portfolio to help meet your retirement goals — get started.
How does the Canadian Pension Plan work?
Nearly all individuals who work inside of Canada are eligible to contribute toward and receive benefits from CPP. Standard benefits are reserved for those who reach the full retirement age of 65, although there are provisions for people between the ages of 60 to 65, those with a chronic disability, and survivor benefits to those who lost someone before they reached retirement age.
CPP taxes wages in a manner that is split between the employer and the employee, although the net effect is to reduce employee wages by the combined taxable amount. Taxes on wages begin at age 18 and end at age 65, unless the individual worker has already begun receiving benefits or has died. In general, CPP tax rates and income thresholds are lower than those of the U.S.'s Social Security system; corresponding benefits also tend to be much lower.
Those taxed Canadian wages are placed into a trust fund managed by the CPP Investment Board, which in turn invests the funds in stocks, bonds, and other assets.
When an individual reaches retirement age, their benefits are determined based on the number of years they contributed the required minimum amounts. To qualify for the maximum benefit they must not only have contributed to CPP for 40 years, but also have contributed the sufficient amount in each of those years.
CPP is designed to replace about 25 percent of the contributor’s earnings on which initial contributions were based. It is indexed to the Consumer Price Index (CPI), an indicator of changes in consumer prices experienced by Canadians.
There are several rules governing the amount an individual will receive upon retirement or disability. This amount is based on the person’s age and how much he or she contributed to CPP while working.
How much you can get 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 earnings throughout your working life
For 2020, the maximum monthly amount you could receive as a new recipient starting the pension at age 65 is $1,175.83.
You can get an estimate of your monthly CPP retirement pension payments by logging into your My Service Canada Account.
This free retirement calculator will help you understand how much you’ll need to save for retirement.
Situations that can affect your pension amount
Working while receiving the CPP
You’ll qualify for the CPP post-retirement benefit if you work while receiving your CPP retirement pension while under age 70 and keep making contributions.
Each year you contribute to CPP will result in an additional post-retirement benefit and increase your retirement income. You will receive this benefit the following year. You’ll then receive it for the rest of your life.
You can choose to stop your post-retirement contributions when you reach age 65. Your contributions will stop when you reach age 70, even if you’re still working.
Contributions after age 65
If you work after you turn 65 and don’t yet receive the CPP retirement pension, periods of low earnings before age 65 will be automatically replaced with periods of higher earnings after age 65. This will increase your pension amount.
Periods of low or no salary
If you have years of low or no earnings, up to 8 years of your lowest earnings will be automatically excluded when calculating the base component of your CPP retirement pension. This will increase your pension amount.
The enhanced component of the retirement pension is based on your contributions to the CPP enhancement. It’s calculated using your best 40 years of earnings.
Periods of raising children
The child-rearing provisions can help to increase your CPP benefits depending on your earnings during the period you were caring for your children under the age of 7. The provisions may also help you to qualify for other benefits.
Periods of disability
The months when you received a CPP disability payment will not be included in the calculation of the base component of a CPP benefit. This will increase your pension amount and may help you qualify for other benefits.
You can share your pension 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 equally between you and your spouse or common-law partner if you divorce or separate.
Other CPP benefits
In addition to the CPP retirement pension, you may also qualify for other CPP benefits. In most cases, you will need to apply.
CPP disability pension
You can’t receive a CPP disability pension and a CPP retirement pension at the same time. Your CPP disability pension will be automatically converted to a CPP retirement pension when you turn 65.
CPP post-retirement disability benefit
If you’re receiving the CPP retirement pension, are under age 65, and you have a severe and prolonged disability, you may qualify for a CPP post-retirement disability benefit if you made enough CPP contributions. This amount is added to your monthly CPP retirement pension payment. You will receive it until you turn 65. You have to apply for this 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’re already receiving a CPP survivor’s pension when you start receiving your CPP retirement 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. You need to apply for this benefit.
If you die and are a CPP contributor, the death benefit provides a one-time payment to (or on behalf of) your estate.
Canadian pension plan eligibility
To qualify for CPP you must:
be at least 1 month past your 59th birthday
intend for your CPP to start within the next 12 months
have worked in Canada and made at least one valid CPP contribution
Valid contributions can be either from work you did in Canada or the result of receiving credits from a former spouse or former common-law partner at the end of the relationship.
The standard age to start the pension is 65. However, you can 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.
There’s no benefit to waiting after age 70 to start receiving the pension. The maximum monthly amount you can receive is reached when you turn 70.
To complete your application you need to do the following:
Make sure you qualify.
Decide when you want your pension to start.
Decide how to apply.
Submit your application.
Review your application status.
To apply online you’ll need a My Service Canada Account (MSCA).
Through MSCA, you can see an estimate of what you’ll receive. After you submit your application, you’ll be notified that your application has been received and will be assessed.
You should receive a notice of the decision in the mail between 7 and 14 days.
You must complete and send a paper application 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
To apply by paper, you’ll have to complete the Application for a Canada Pension Plan Retirement Pension (ISP-1000) form and mail it to Service Canada, or drop it off at a Service Canada office.
If you submit a paper application, it can take up to 120 days to get your written notification of decision.
You can view your application status using your MSCA, and selecting the “Application Status” link.
You can also contact Service Canada.
The role of the CPP Investment Board
The CPP Investment Board (CPPIB) was created in 1997 under the direction of then Finance Minister Paul Martin as an independent, but accountable, body to monitor and invest the funds held by the CPP.
The CPPIB began its investing program in 1999, establishing the CPP Reserve Fund to hold investment earnings and CPP contributions not needed to pay current pensions.
It reports quarterly to the public on its performance, has a professional board of directors to oversee the operations of the CPP reserve fund and to plan changes in direction.
The board reports annually to Parliament through the federal Minister of Finance.
The CPPIB reserve fund receives its funds from the CPP and invests them like a typical large fund manager would. The CPP reserve fund seeks to achieve at least the projected return (inflation-adjusted) needed to help sustain the CPP, a rate set at 4.0% by 2017 in the CPP actuary’s report.
The strategies used to achieve these targets are:
Diversification: In 1997, the CPP fund was 100% invested in government bonds, but it has since diversified not only by asset class, but also internationally.
Employing basic asset allocation theories, with diversification of investments as one of the objectives.
The most recent triennial report by the Chief Actuary of Canada indicated that CPP is sustainable over a 75-year projection period.
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