CPP contributions: How much CPP will I receive when I retire?
Author: Tom Drake
The Canada Pension Plan (CPP) is a defined benefit pension plan administered by the federal government. Its purpose is to provide working Canadians with a source of guaranteed income when they retire.
How does CPP work?
While you are working, you contribute to the CPP through regular deductions from your paycheque. CPP payments can start as early as age 60, and last for the remainder of your life. Not everyone receives the same payment, however. Your CPP payment amount will depend on a number of factors, including how many years you contributed, and how much you earned while you were working.
Who contributes to the CPP?
If you are over 18 and working in Canada (outside of Quebec), it's very likely that you are contributing to the Canada Pension Plan. There are exceptions, which I'll explain in more detail later, but know that the vast majority of employed Canadians are contributing to the CPP.
What is the maximum CPP contribution for 2020
For 2020, the CPP contribution rate for employees is 5.25% on earnings between $3500 and $58,700. Employers are required to match the employee contribution of 5.25%, therefore the maximum contribution for 2020 is $2,898.00 each. If you are self-employed, you can also benefit from the CPP, but you are responsible to make both the employee and employer contribution while you are working.
Because CPP contributions cease on any income over $58,700, this is known as the maximum pensionable earnings amount (YMPE). This is why many workers see an increase in their take-home pay at some point during the year. CPP contributions have been maxed, and contributions are paused until the beginning of the following year.
But enough about CPP contributions. You're probably wondering how all of this benefits you when it comes to receiving CPP payments. Let's take a closer look at how the CPP works after you retire.
How will I benefit from CPP contributions?
By contributing to the CPP, you are ensuring the viability of important government benefits for when you need them later in life. Also, as your CPP contributions increase along with your income, you become eligible for a larger benefit when you begin receiving payments.
As a contributor to the CPP, there are 4 primary benefits you may become eligible for at some point in the future: retirement pension, the post-retirement benefit, disability benefits, and the death benefit.
The CPP retirement pension is a monthly benefit that is designed to replace a portion of your employment income after you retire. To qualify for a retirement pension, you have to be at least 60 years of age, and you must have made at least one eligible contribution to the CPP during your working years.
Your CPP payment is not triggered automatically. You must apply for it when you're ready to begin collecting benefits. Part of the reason for this is that you can choose when to start collecting CPP. You can receive an unreduced benefit at age 65, or opt for a lesser amount earlier. The benefit is reduced by a certain percentage for every month you begin collecting CPP before 65.
These days, more and more Canadians are choosing to continue working past age 60. When this happens, they can choose to collect their CPP while they continue to work. Any contributions they make up to age 70 will be designated towards their post-retirement benefits (PRB). CPP contributions stop at age 70, even if you continue to work.
If you are under 65 years old, have contributed to the CPP, and have a mental or physical disability, you may be eligible to receive a CPP disability benefit. Your disability must be severe enough that it prevents you from performing regular work duties, or be considered long term and indefinite, potentially resulting in a shortened life expectancy.
If you are receiving the disability benefit, and are the parent of a minor child, or an adult child between 18 and 25 attending a post-secondary institution, your child may be eligible to receive a benefit under the CPP. They can also receive a benefit if you were to pass away.
The CPP death benefit is a one-time payment made to the estate of a CPP contributor. When this occurs, the authorized estate representative is the one responsible for administering the death benefit on behalf of the estate.
In the absence of an estate (where there is no will, and an authorized representative has not been named, the party responsible for paying the funeral expenses is eligible to apply for and receive the death benefit, to assist with burial costs etc. All eligible contributors to the CPP receive a flat amount of $2500 as a death benefit.
What is the maximum CPP payment for 2020?
If you were eligible to receive the maximum CPP payment in 2020, you would receive $1175.83/month, or $14,109.96/year. Unfortunately, most Canadians receive a lesser amount, in fact, the average monthly CPP payment is closer to $650.
There are a few reasons for this, with the main one being that it's not easy to maximize your contributions during your working years. Another factor is that many Canadians apply for the CPP prior to age 65, resulting in a reduced monthly benefit.
To qualify for the maximum CPP payment, you would need to have made CPP contributions for at least 39 years between ages 18 and 65. You would also need to maximize contributions for the majority of your working years by earning the maximum pensionable earnings amount ($58,700 in 2020).
When is the CPP paid each month?
CPP payments are paid out on the 3rd business day prior to the end of every month. These days, most Canadians receive the funds via direct deposit into their bank account. I wrote an article recently that lists the CPP payment dates for 2020.
When should I start collecting CPP?
There is no perfect answer to this question, as everyone's situation is different. If you wait until age 65 to begin collecting CPP, you will receive an unreduced monthly benefit. You can choose to collect as early as age 60, or anywhere in between, but your benefit will be reduced for every month before age 65.
If you have other ample income sources and don't require the CPP to meet your day-to-day living requirements, it may be beneficial to wait until age 65. On the flip side, if you are retiring before 65, and are relying on the CPP to supplement your retirement income, it may be better to take it early.
These are merely guidelines, however. There are those who believe that it's best to begin collecting CPP as soon as you qualify, given that our lifespan is uncertain. While people are living longer than ever these days, nothing is guaranteed.
Before applying for the CPP, I highly recommend that you consult with a retirement planning professional who can help you make the best decision.
How do I apply for CPP?
The fastest way to apply for CPP is by filling out an application online. According to the CRA, the turnaround time for online applications is between 7 and 14 days. You can also apply in-person at a Service Canada location or by mail, but the processing time is much slower this way, as long as 4 months. Regardless of the method you choose, it's always a good idea to apply well in advance of when you plan to begin receiving CPP benefits.
Upcoming changes to CPP contribution rates
To ensure that the CPP program is sustainable for future generations, the federal government recently announced changes to CPP contribution rates in future years. As I previously mentioned, the contribution rate for 2020 is 5.25%, but this will rise to 5.95% by 2023.
Beginning in 2024, a new upper limit will be introduced, and employees making more than the YMPE will need to contribute 4% on earnings between that amount and the new upper limit. The full benefit of these changes will not be realized until 2065, but increases will begin well before that date.
Final thoughts on CPP payments
Even if you are eligible for the maximum CPP payment when you retire, it won't be close to enough for a comfortable retirement. In other words, you can't ignore other forms of retirement savings. Include the CPP in your retirement planning, but make sure you're also contributing to your RRSP, TFSA, as well as a company pension plan if you have one.