1. Introduction
CPP, short for the Canadian Pension Plan, is a monthly taxable benefit received by Canadian pensioners starting between the age of 60 and 70 and continuing for the rest of their life. The payments are adjusted to the cost of living (they increase annually depending on the Consumer Price Index). The typical starting time to receive the benefit is when one turns 65. However, individuals have the option to start receiving as early as when they are 60, but the monthly payments will be lower, or to start later, and the monthly payments will be higher (the increase is applicable up until the individual turns 70). One must apply to start their pension benefits. The application can be done online on the CRA website (the typical time to process is one to two weeks) or sent by mail or delivered at a Service Canada Centre (normally processed in 120 days).
The appropriate time to start receiving the benefits will depend on many factors, including the current financial and health situation of the retiree and their retirement plans. For instance, individuals not needing the benefits early and expecting to have many years in retirement may prefer starting the plan later, so that their monthly payments will be higher. Starting the plan earlier, however, will help in meeting short-term needs, but it will undermine the long-term monthly earnings from the plan.
2. Pension Amounts
An individual can receive the benefit if they 1) are at least 60 years of age, and 2) have contributed to the CPP at least once. The amount of the monthly benefit depends on 1) the age one starts receiving the benefits, 2) their income in any month they have worked after the age of 18, and 3) the contributions to the CPP (Note: other factors can also influence the amount of the benefit).
CPP contributions depend primarily on income level. They are mandatory for individuals over 18 and below 70 years of age working in Canada (outside of Quebec) and earning more than a certain minimum (currently it is $3,500 annually). Half the contribution is made by the employer, and the other half by the employee. Self-employed individuals pay the full amount on their own. The contributions can also be made by a spouse or a common-law partner. For more information about the exact calculation of the benefit, please refer to Appendix 1.
There is a maximum monthly benefit for new recipients at the age of 65. This benefit depends on the current year, and for 2022 it is $1,253.59. One will receive benefits up to this amount, depending on their individual circumstances.
The monthly amounts would be lower if one starts receiving the pension before 65, or higher if they start after 65. For any month before turning 65, the payments will be 0.6% less; for any month after 65, the payments will be 0.7% more (up to the age of 70). The maximum decrease (starting at the age of 60) and increase (starting at the age of 70) will be -36% and 42% respectively. Thus, one can receive approximately double the monthly payments if they choose to wait for an additional 10 years and become recipients at the age of 70 instead of at 60.
There are a few other situations that will affect the amount of the benefits. Individuals working and not receiving the CPP pensions after the age of 65 (up to 70) can use the income to replace low-earning periods before 65, which will increase the benefit amount. Further, the CRA automatically disregards the 8 lowest-earning years, which boosts the average annual income, and thus the pension amount. The CRA also has provisions for periods of raising children and periods of disability. Individuals can also share their pension with a spouse.
The main factors determining the amount were listed above. The exact calculation is complicated, so one is advised to use the built-in calculator available in the My Service Canada Account at the CRA website, which will provide an estimate of the pension payments. For more information about the exact calculation, please refer to Appendix 1.
3. Other Benefits
Individuals can also receive other CPP benefits. One of them is the post-retirement benefit. It is received if an individual continues working and contributing to the account after they have started receiving the CPP benefits. This option is only applicable up to the age of 70 (after that one can no longer contribute), and one may opt out after they turn 65. These contributions essentially increase the retirement income. CPP benefits are also paid for other circumstances, like in case of a disability.
4. Appendix 1: Formulas
- Contributions:
The amount of the contributions depends primarily on the income level. There is a minimum and maximum earnings level on which the contributions are based on. The minimum is set at $3,500, while the maximum for 2022 is $64,900 (the maximum changes every January).
The formula for the contributions is to subtract the basic pay-period exemption (the pre-determined exemption for the year, $3,500 for 2021, by the frequency of payments) from the total pensionable income (the gross income plus any taxable benefits). The resulting amount is multiplied by the CPP contribution rate (in 2019 it is 5.1%). The result is the contribution that should be made by the employee. The same amount should be contributed by the employer as well.
Example: An individual has a monthly salary of $1000 and taxable benefits of $200. Then the basic pay-period exemption is $3,500/12 = $291.67, and the pensionable income is $1000 + $200 = $1,200. The employee contribution is ($1,200 - $291.67)x5.1% = $46.33. The total contribution (with the part of the employer) is twice that amount, or $92.66.
- Benefits:
1. Calculate the number of contributing months. These include all months between you turn 18 (or after January 1966) up to the time you start receiving the CPP benefits, less any month that you receive the CPP disability benefit.
2. Calculate the total adjusted pensionable earnings. For each year, get the unadjusted earnings, divide by the year’s maximum pensionable earnings, and multiply by the average of the last five years’ maximum pensionable earnings.
3. Find the “dropout periods”. There is a general dropout for which everyone is eligible, but extra dropouts can also be Child Rearing Provision.
4. Calculate the average monthly pensionable earnings. It is the total adjusted pensionable earnings divided by the number of contributing months after dropout.
5. Calculate the retirement for benefit calculation. It is 25% of the average monthly pensionable earnings. This is the amount if you start receiving the pension at the age of 65.
6. Adjust if starting at another year. Adjust that amount up (by 0.7% per month) or down (by 0.6% per month) if you start after or before turning 65. Note that if you start after 65 there will be an additional dropout provision.