Canada Pension Plan

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The Canada Pension Plan (CPP) provides contributors and their families with retirement, disability, survivor, death and children’s benefits. It is an example of a defined benefit pension plan. The Canada Pension Plan operates throughout Canada with one exception, the province of Quebec has their own Québec Pension Plan (QPP) that is similar to the Canada Pension Plan.

The assets of the CPP are managed by the CPP Investment Board (CPPIB). The CPPIB dates back to 1997 when an Act of Parliament[1] created the organization to manage and invest the CPP Fund to help ensure the long-term sustainability of the Canada Pension Plan.[2]

Contribution information

With very few exceptions, every person in Canada between the ages of 18 and 70 who earns a salary must pay into the Canada Pension Plan.[3] Contributions are made on employment income above $3500, the basic exemption, and up to yearly maximum pensionable earnings (YMPE) of $54 900 in 2016.[4]

You and your employer each pay half of the contributions. In 2016 this is 4.95% of "pensionable" earnings, i.e. earnings between the basic exemption and the YMPE, for both the employee and the employer.[5]

If you are self-employed, you pay both portions, for a total of 9.9%. In this case, contributions are based on your net business income (after expenses). You do not contribute on any other source of income, such as investment earnings.

Applying for CPP benefits

You are required to apply to receive CPP benefits. If you made CPP contributions the year before starting your pension, make sure they do an adjustment once the pension is in pay.

When you apply for CPP you must confirm your personal information and provide banking information for direct deposit and the date when you'd like your pension to begin.[6] You can apply a maximum of 12 months before the date you would like your pension to start.If you are 65 years plus 1 month or older, you can request retroactive payments for a maximum of 11 months, or back to your 65th birthday plus 1 month—whichever is shortest.[6]

The application for CPP is online, by signing in or registering for a My Service Canada Account (MSCA).[7] Not everyone can apply online as the application procedure excludes a number of cases.[7] If you have applied online, you will receive a letter within a month confirming your eligibility, your start date and the amount you will receive.[8]

For the latest information, your best resource is the Government of Canada's Canadian Pension Plan - Overview.

Pension sharing

The CPP allows retirement pension sharing between spouses or common-law partners.[9] The portion of your pension that can be shared is based on the number of months you and your spouse or common-law partner lived together during your joint contributory period. Pension sharing can reduce the total income tax owned for the couple. There is a separate form to apply for pension sharing.

Retirement pension

The retirement pension[10] is a monthly payment available to CPP contributors beginning as early as 60 years of age or as late as age 70.

Your pension is based on your contribution history, how much you have contributed and how long you have contributed. There is some protection built into the CPP system for low-earning years, via the general drop-out provision,[11] and the child rearing provision,[12] which must be requested.

CPP aims to replace 25% of the earnings on which the worker contributed, assuming retirement at age 65. To get the maximum CPP pension, a worker must have earned the YMPE or more for 39 years between age 18 and age 65[13] so most people do not get the maximum pension. The 39 years are based on the general drop-out provision, which allows 17% of the lowest income months to be dropped from the calculation.[14]

When to claim it

The "normal" age to claim your CPP pension is 65. Retirement earlier or later than 65 will decrease or increase the monthly pension, respectively. Benefits do not increase beyond age 70 so there is no reason to wait later.

Claiming CPP early: If you need the income, or if your life expectancy is low, you may be a candidate for taking CPP as early as possible.[15] Early retirees are also possible candidates because this reduces the number of "zero work income" years in their record. But each situation is different and you are encouraged to simulate different scenarios.

Delaying CPP: In 2012, less than 4% of new CPP recipients were 66 or older.[16]. But delaying the start of your CPP pension, and perhaps Old Age Security (OAS), has the effect of significantly increasing the yearly benefits payable. These benefits are indexed to the cost of living and are guaranteed to last until death. Therefore, by drawing down other sources of income sooner, to make up for the shortfall created by the delay in CPP and/or OAS, the retiree is making a choice equivalent to the purchase of an indexed life annuity. This decreases longevity risk, and may allow the retiree to enjoy a greater total income in early years.[17] Good candidates for this strategy will have no bequest motives, no cash-flow issues, and will be in above-average health.[18] According to Tim Cestnick, one must live beyond the age of 81 to justify, mathematically, delaying CPP to age 70.[19] See also this blog post.

DIY calculations

Step-by-step instructions on how to calculate your CPP pension are given by Doug Runchey.[14]

Other CPP benefits

Disability benefits

The disability benefit[20] is a monthly benefit available to qualified CPP contributors and their dependent children.

Survivor benefits

Survivor benefits[21] are paid to a deceased contributor’s estate, surviving spouse or common-law partner and dependent children. Benefits include:

  • The death benefit – a one-time payment of up to $2,500 to, or on behalf of, the estate of a deceased Canada Pension Plan contributor;
  • The survivor's pension – a monthly pension paid to the surviving spouse or common-law partner of a deceased contributor. Maximum monthly benefits in 2009 are $506.38 for individuals younger than 65 and $545.25 to those over age 65; and
  • The children's benefit – a monthly benefit in 2009 of $213.99 for dependent children of a deceased contributor.

Payment information

Canada Pension Plan payments are taxable income.

Payment rates

Canada Pension Plan rates[22] are adjusted every January if there are increases in the cost of living as measured by the Consumer Price Index.[23]

Payment dates and direct deposit

If you have not requested payment by direct deposit, your payment will arrive at your home address by mail during the last three banking days of each month.[24] You can request payment by direct deposit, which automatically deposits your Canada Pension Plan and Old Age Security payments into your bank account in Canada, the United States, or in a number of other countries.[25]

Financial situation of the Plan

By design, CPP is only partly funded, i.e. outflows are paid mostly from new contributions, but can also come from investment income derived from the CPP fund.

As of March 31st, 2016, the CPP fund value was $278.9 billion.[26]. The CPP fund's asset allocation at that date was about 21% "real assets" (real estate and infrastructure), 27% fixed income and 52% public and private equities.[26]

In the recent triennial review released in 2016,[27] the Chief Actuary of Canada reaffirmed that the CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report. The Chief Actuary's projections are based on the assumption that the Fund will attain a 3.9% real rate of return, which takes into account the impact of inflation.

Proposed enhancement to the CPP

On October 6, 2016, legislation was introduced to enhance the Canada Pension Plan (CPP).[28] See Canada Pension Plan (CPP) Enhancement for detailed information.

See also

References

  1. Canada Pension Plan Investment Board Act, viewed February 14, 2014.
  2. Our History | CPPIB | Canada Pension Plan Investment Board, viewed February 14, 2014.
  3. Service Canada, Canada Pension Plan Contribution Rates, viewed July 22, 2012.
  4. Government of Canada, Contributions to the Canada Pension Plan, viewed December 19, 2016
  5. Canada Revenue Agency, CPP contribution rates, maximums and exemptions, viewed December 19, 2016
  6. 6.0 6.1 Government of Canada, Canada Pension Plan – What you need before you start, viewed January 10, 2016.
  7. 7.0 7.1 Government of Canada, Canada Pension Plan - Apply, viewed January 10, 2016.
  8. Government of Canada, Canada Pension Plan - After you’ve applied, viewed January 10, 2016.
  9. Government of Canada, Pension Sharing, viewed December 24, 2016
  10. Service Canada, Canada Pension Plan - Eligibility - Canada.ca, Viewed 23 December 2016
  11. General Drop-out Provision - Canada Pension Plan - Service Canada viewed February 14, 2014.
  12. Child-Rearing Provision - Canada Pension Plan - Service Canada, viewed February 14, 2014.
  13. Jim Yih, CPP Payments: How much will you get from Canada Pension Plan in Retirement?, viewed December 19, 2016
  14. 14.0 14.1 Doug Runchey, How to calculate your CPP retirement pension, viewed December 19, 2016
  15. Doug Runchey, When should I start taking my CPP?, DR Pensions Consulting, viewed December 19, 2016
  16. Adam Mayers, Should you claim CPP at 60 or wait until 70, Toronto Star, January 30, 2013, viewed December 19, 2016)
  17. Fred Vettese, Why you should wait until you are 70 to collect CPP benefits, National Post, October 16, 2016, viewed December 14, 2016.
  18. John Heinzl, The boomer’s dilemma: When to start collecting CPP?, The Globe and Mail, November 6, 2015, viewed December 19, 2016
  19. Tim Cestnick, How to time the collection of CPP and OAS, The Globe and Mail, September 25, 2015
  20. Service Canada, Disability Benefit, Viewed July 16, 2009
  21. Service Canada, Survivor Benefits, Viewed July 16, 2009
  22. Service Canada, Canada Pension Plan (CPP) - Payment Rates, Viewed July 16, 2009
  23. Service Canada, Canada Pension Plan Rates and the Consumer Price Index, Viewed July 16, 2009
  24. Service Canada, Old Age Security and Canada Pension Plan payment dates - Service Canada, viewed December 30, 2013.
  25. Service Canada, Direct Deposit - Frequently Asked Questions, viewed July 22, 2012.
  26. 26.0 26.1 CPPIB Fiscal 2016 Annual Report, viewed December 19, 2016
  27. Actuarial Report (27th) on the Canada Pension Plan As at 31 December 2015, viewed December 19, 2016.
  28. Canada Revenue Agency, Canada Pension Plan enhancement

Further reading

External links