Select Page

Canada Pension Plan (CPP) is truly THE foundational element for most Manitobans’ retirement plans. Created in 1965, CPP has been a mandatory fixture for Canadian employees for decades. You’ve likely noticed deductions off your paycheques to contribute to CPP; perhaps you’ve talked with friends or family members about receiving CPP. Today’s post is all about understanding the nuances behind this integral program so you can better understand how it fits into your personal situation.

The Basics

To understand why CPP exists in its current format, you need to start with the general philosophy behind it. CPP is not meant to be the ONLY piece of the retirement puzzle. Rather, the goal of CPP is to replace ¼ of your average income earned in your working years. That amount is capped at a maximum threshold and indexed to inflation to maintain standards of living.

Think of CPP as a legislated rule that Canadian employees, and their employers, save enough in their working years to have 25% of their income continue into retirement (proportionately less for high income earners). The savings are deducted through payroll, managed through the national CPP Investment Board, and income is distributed through Service Canada.

How Are My Contributions Determined?

You are required to contribute 4.95% of every dollar in earned income above $3,500 and less than the Yearly Maximum Pensionable Earnings (YMPE for short), an annually adjusted figure. For example: given that 2021’s YMPE is $61,600, the most a Canadian will contribute to CPP this year is ($61,600 – $3,500) x 4.95% = $2,875.95. Your employer is required to match your CPP contributions; meaning the self-employed technically contribute twice as much!

If you earn $61,600 or more this year, you will have maximized your CPP contributions for 2021. After you’ve capped out on annual contributions you’ll likely notice your net pay grow since your employer is no longer withholding any more CPP contributions for the year.

How Is My CPP Payment Calculated?

Every person’s CPP payment is unique to their working career. You receive credits for the number of years working and contributing to CPP, starting at age 18, factoring in your contributions along the way. Everyone is allowed to remove their eight lowest earning years from the calculation. So your time spent in post-secondary education, raising kids or working abroad has a smaller impact on your final outcome.

The end arithmetic from your CPP credits is a percentage of that year’s maximum payment at “normal retirement age.” Right now, normal retirement age is 65. However, you have the option to start your CPP as early as 60 or as late as age 70. Starting early will cost you a penalty, reducing your payment by 0.6% for every month. That means an individual who starts at age 60 will receive 36% (0.6% x 60 months) LESS than if they had waited until age 65. Conversely, you will receive a bonus of 0.7% for each month you defer taking CPP after your 65th birthday. Meaning a 70 year-old would receive 42% (0.7% x 60 months) MORE each month than if they started CPP at normal age.

Where Can I Find My CPP Estimate?

You can create an account and log into Service Canada’s website to view your current CPP trajectory. This is a great exercise if you’re nearing retirement age or considering starting your CPP payments within the next few years!

There are many, differing opinions on the cost and value of the Canada Pension Plan. At the end of the day, I firmly believe that having a guaranteed source of income in retirement is a net benefit to the vast majority of us! CPP may not be the perfect program for every situation but it is a nice foundation on which to build your retirement plans.