How Does CPP Work? How Much Money Will CPP Pay Me?

Ever wonder exactly how much money you can expect to receive from Canada Pension Plan when you retire? I did, and the answer might surprise some of you. Canada Pension Plan, more commonly referred to as CPP, was introduced in 1965 as a national social insurance program. The program provides partial retirement income to Canadians when they retire. Quebec also has its pension plan known as the Quebec Pension Plan (QPP), which began in 1966. For this post, I will be discussing only the Canada Pension Plan.

CPP basics

If you’re between 18 and 65 years of age and working or self-employed, you must participate in CPP. Your earnings must be more than the minimum basic year exemption limit for contributions to CPP. For 2022, the minimum basic year exemption is $3,500, which has remained the same since 1996.

CPP contributions are deducted from your paycheque by Canada Revenue Agency, and CPP Investments manages the money. Services Canada is responsible for delivering any retirement income you might be entitled to upon retirement.

During its latest quarter, CPP Investments had a third-quarter return of 2.4% with a 10-year annualized rate return of 11.6% and a cumulative net income of $351.5 billion. In short, they are doing a pretty good job at managing the money Canadians are giving them.

How much can you contribute to CPP?

Contributions made to CPP are those above the minimum year basic exemption and no more than the maximum pensionable earning income for the year. For 2022, you have to make more than $3,500 to contribute to CPP, with the maximum pensionable earning capped at $64,900 for 2022. If you earn more than the maximum pensionable earnings, you cannot make additional CPP contributions above that limit.

Employees and employers split their CPP contributions, while self-employed individuals are responsible for 100% of their contributions. Before 2019, individuals who work for an organization were responsible for 4.95%, while their employer was responsible for an additional 4.95%. Self-employed individuals are responsible for 100% of their CPP contribution, which amounts to 9.9% before 2019.

Today, the rates have increased to provide additional income as people live longer. The government has a two-step program over seven years to increase CPP contributions.

Step one involves increasing employee contributions gradually by one percentage point from 2019 to 2023. The contribution rate for employees will increase from 4.95% to 5.95%. The self-employed rate and employer rate will also see an increase. By 2023, the self-employed and employer contribution rate will have increased to 11.9% and 5.95%, respectively.

Step two involves allowing people to contribute more earnings to CPP above the current pensionable earnings. The government plans to introduce new limits, which will start in 2024.

How much will you receive from CPP when you retire?

If you meet all the requirements to qualify for the CPP pension, you may apply to receive the pension at age 65 with no reduction to your entitled pension. You may choose to receive your pension as early as 60, but your pension payments will decrease by 0.6% for each month before age 65.

On the opposite end, you can choose not to receive your pension at 65 and delay it until age 70. If you decide to do that, your pension payment will increase by 0.7% per month after age 65. There are no additional increases if you choose to wait beyond age 70, but no matter when you take it, the pension is indexed to the consumer price index (CPI).

Up until 2019, the CPP pension replaced approximately 25% of your monthly average pensionable earnings during your working years. The government of Canada made some changes to the CPP plan in 2019, which resulted in higher contributions requirements and higher pension payments. Currently, you can expect to receive about 33%. You read that right—just 33% but better than 25%.

The maximum monthly amount you can receive as of 2022 if taking a CPP pension at 65 is $1,253.59. Planning for your retirement is crucial because government programs are not enough to maintain a reasonable income level upon retiring.

Relying on government-sponsored pension programs shouldn’t be your retirement strategy. It would be best to view CPP and other similar programs as components or pieces of your overall retirement strategy, not your retirement plan.