What is CPP (Canada Pension Plan)?
The Canada Pension Plan (CPP) is a crucial part of every Canadian's retirement strategy. It’s a government-administered program that provides retirement, disability, and survivor benefits. If you're wondering how CPP can impact your financial future, this guide will break down everything you need to know.
What is the CPP?
The CPP is a mandatory public pension plan for all working Canadians outside of Quebec (which has its own plan, the QPP). It provides a steady income to retirees, helping cover living expenses in retirement. Funded through contributions from both employees and employers, CPP is designed to replace up to 25% of your average lifetime earnings.
CPP vs. QPP: What’s the Difference?
While the Canada Pension Plan (CPP) serves most Canadians, residents of Quebec are covered by a similar program called the Quebec Pension Plan (QPP). Both plans are similar in structure, but they are managed separately. The primary differences lie in contribution rates and eligibility criteria. For instance, the QPP tends to have slightly higher contribution rates than the CPP.
What Happens if You Contribute to QPP and Then Move Out of Quebec?
If you contribute to the QPP and then move to another province, your contributions will automatically be transferred to the CPP. The total contributions from both plans will be combined when calculating your retirement benefits, ensuring you don’t lose out on any pension income. This system allows for flexibility if your career takes you across provincial lines.
What Are the Contributions to the Plan?
Both employers and employees contribute to CPP. In 2025, the contribution rate is 5.95% of your salary, up to a maximum annual pensionable earnings limit of $71,300 (set for 2025). If you're self-employed, you’re responsible for paying both the employer and employee portions, which total 11.90%. Yearly contributions stop once your earnings exceed the maximum limit.
Maximum CPP Contributions in 2024
In 2025, the maximum contribution for an employee is $4,034.10, with an equal amount contributed by the employer. For self-employed individuals, the maximum contribution is $7,508.90. These contributions help fund your CPP benefits and are invested by the Canada Pension Plan Investment Board (CPPIB).
What is CPP Enhancement?
The CPP enhancement is a major reform to the Canada Pension Plan, aimed at increasing retirement benefits for future retirees. It started in 2019 and involves higher contribution rates, phased in over seven years, to provide a more significant pension for all Canadians.
How Does CPP Enhancement Work?
Under the enhancement, both employees and employers contribute more to the CPP. By the time the enhancements are fully phased in (by 2025), the CPP will replace up to 33% of pre-retirement income, compared to 25% under the original plan. This means future retirees will receive higher monthly payments.
Who Benefits from CPP Enhancement?
The CPP enhancement primarily benefits younger workers and those with many years left until retirement. It’s particularly advantageous for people who have stable, long-term employment, as the longer you contribute under the enhanced CPP, the higher your pension will be.
Example: Standard CPP vs. Enhanced CPP
Let’s consider 55-year-old Imaginary-Mary, who will retire in 10 years at age 65. Mary is currently earning a salary that qualifies her for the maximum CPP benefit.
If Mary begins taking her standard CPP at age 65, she would receive approximately $1,307 per month, based on current maximum benefits.
However, if Mary contributed under the enhanced CPP scheme for the next decade, her benefit could increase to $1,771 per month at age 65. This significant difference of nearly $466 each month underscores the advantages of the CPP enhancement.
When Can You Start Taking Your CPP Benefit?
You can start taking your CPP benefits as early as age 60, but doing so will reduce your monthly payment. Conversely, if you delay taking your CPP until after age 65, your monthly benefit will increase. Each month you wait after age 65, your pension grows by 0.7%, up to age 70.
Impact of Taking CPP Early or Late
For example, if you take your CPP at age 60, you will receive 36% less than if you wait until age 65. On the flip side, delaying your benefit to age 70 results in a 42% increase compared to taking it at 65. It’s essential to weigh your options and consider factors like your health, financial situation, and life expectancy. Check out these articles on the reasons for taking CPP early, or taking CPP later than 65.
Fun Facts
- CPP was established in 1965 and is now considered one of the most stable public pension funds globally.
- CPP contributions are invested by the Canada Pension Plan Investment Board (CPPIB), which manages over $500 billion in assets.
- Approximately 6 million Canadians received CPP benefits in 2023.
Conclusion
The CPP plays a crucial role in your retirement planning. However, it’s essential to supplement it with additional savings and income sources. Use the Retirementize online income calculator to optimize your CPP benefits and ensure you're on track for a financially secure retirement. Or maybe you are interested on 10 reasons to delay taking your CPP.