The Canada Pension Plan or CPP is a national retirement pension plan provided by the Federal Government to Canadian citizens in old age. If you’re only in your 20’s or 30’s, you might be worrying it won’t be available to you when you retire.
Good news: the CPP is over-funded and will be there for you when you need it!
What is the Canadian Pension Plan (CPP)?
The CPP is a federal pension that provides a taxable monthly income to retired Canadians. Canadian citizens pay into it over their working lifetime, then make withdrawals in retirement to supplement their income. In order to qualify for CPP benefits in retirement, you must:
- Be over the age of 60
- Have contributed at least once to the plan
If you’re fresh out of college or just starting your career, you’re probably not thinking very much about your income after 60. But knowing what the CPP is and what it will do for you can help your own financial planning now.
What are the maximum CPP contributions?
If you work in traditional employment for a salary or hourly job, your Canada Pension Plan contributions will be deducted automatically from each paycheque. As of 2021, 5.45% of your paycheque goes towards CPP, up to a maximum income of $61,600 and a maximum contribution to the CPP of $3,166.
| Item | Amount |
| 2021 CPP contribution | 5.45% |
| 2021 CPP Maximum insurable earnings | $61,600 |
| 2021 CPP Maximum employee contribution | $3,166 |
| 2021 CPP Maximum employer contribution | $3,166 |
If you earn less than $61,600, you will pay less into the plan. Canadians who earn less than $3,500 will not pay anything towards CPP.
If you ever over-contribute to your CPP in any given year, you will receive the overpayment amount back as part of your tax refund.
The Canadian Pension Plan contributions are adjusted to inflation, so they increase each year. They are currently going up to reach a 14% increase by 2025, in order to provide more financial support to Canadians who will retire in the future.
What about years of low or no contributions?
The CPP you’ll be eligible for in retirement is calculated on your “best” 40 years of contributions, with some exceptions.
If you take time away from the workforce to raise children, you may have years with low or even no income, and therefore no CPP contributions. Under the CPP Child-Rearing Provisions, these years will not negatively impact the CPP you’re eligible for in retirement.
Instead, you’ll receive credit for the years your contributions were impacted because you were the primary caregiver of a child under age 7. This increases the amount of CPP you will be eligible for in retirement!
This is excellent for women, who are typically the primary caregivers of children and also more likely to live longer and have less saved for retirement. While not a completely solution to the gender wage gap and the gender wealth gap, it does help!
How much CPP will I get in retirement?
How much CPP you’ll get when you retire depends on three things:
- your average earnings throughout your working life
- your contributions to the plan
- when you choose to start receiving the CPP
Millennials and GenZ will receive more CPP than previous generations!
Up until 2019, the Canadian Pension Plan sought to replace one-quarter of your average earnings over your working life. However, it is increasing to ultimately cover one-third of your average earnings! This means Millennials and Gen Z will actually get more income support in retirement than their parents and grandparents.
The longer you wait to retire, the more money you’ll get
The CPP is a taxable benefit distributed monthly. It’s not automatic, so you’ll have to apply for it when you retire and there is some flexibility around when you choose to start withdrawing from it. You can start withdrawing from the CPP as early as age 60, or as late as age 70.
Most people start withdrawing from the CPP at age 65, as it’s the traditional retirement age. However, Canadians are living much healthier lives for much longer, so it would not be unreasonable for these age limits to increase by the time you retire.
If you choose to start withdrawing from the pension earlier at age 60, you’ll receive less than if you wait until age 70. Since it’s in your best interest to maximize your income in retirement, you’re better off waiting to make any withdrawals from the CPP until age 70. If you retire before then, you can use your personal savings from your TFSA and RRSP or an employer pension to fill the gap until you begin receiving your CPP.
I’m only in my 20’s. Won’t the CPP run out by the time I retire?
Nope! Many young Canadians have the misconception that their CPP funds are insecure, but the Canada Pension Plan is actually one of the best-managed funds in the world. It’s currently over-funded, which means there’s more than enough money to support you in your retirement.
The same isn’t true in other countries, namely our neighbors to the south. Social Security is running out, so there are frequently stories in the news that the pension won’t be there for Millennials and GenZ when they retire.
Canadian young people should rest assured there more than enough CPP for them. It will provide some guaranteed income in old age, even if you’re not retiring for 40 or 50 more years.
So why do I even need to save for retirement if I’ll get the CPP?
Now here’s the bad news: the Canada Pension Plan alone is not enough to support you in retirement. Even when supplemented with the Old Age Security benefit, your monthly income will still come up dismally short.
What is the average CPP payment in 2021?
As of right now, the maximum CPP payment a new recipient at age 65 can receive is $1,204 per month and the maximum OAS you can receive in 2021 is $919 per month. However, the average people receive is actually much lower. Currently, the average CPP payment to retirees is only $614, which is only about half the maximum!
You will need to have additional sources of income to support you in retirement, and the best source of that is your own savings and investments. In addition to providing your additional income to top-up your CPP benefits in retirement, a robust retirement portfolio can also give you lots of flexibility in choosing when to start withdrawing from the CPP.
If you retire at 65 but don’t take the CPP until age 70, you can only do this if you have other cash to draw on! Your retirement savings are essential to ensuring financial security and choices throughout your life.
How to make sure your retirement is fully funded
It’s great to know you’ll receive some income support from the Government of Canada in retirement, but it’s important to take your savings into your own hands. Here is what you need to ensure a comprehensive retirement savings plan:
Use your TFSA to save for retirement
Most people don’t think of the Tax-Free Savings Account (TFSA) first when saving for retirement, but it’s actually the best vehicle to do so.
In the TFSA, all the investment income you earn from interest, dividends, and capital gains is completely tax-free. This means that your withdrawals from your TFSA in retirement will be considered a completely tax-free income. This will let you maximize the CPP and OAS you’re eligible for because your TFSA won’t be considered income.
Since you can build your TFSA into a million-dollar asset, this is a massive benefit. You should prioritize investing in your TFSA, especially when you’re young, to take advantage of its tax-saving power. You can start a TFSA with Wealthsimple with as little as $100.
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Use your RRSP to save for retirement
A Registered Retirement Savings Plan (RRSP) is what most people traditionally think of and use to save for retirement.
This is a tax-sheltered account in which all the investment income you earn from interest, dividends, and capital gains won’t be taxed until you actually make withdrawals in retirement. Because many people have a lower income in retirement than their working years, the RRSP can lower the income taxes you pay over your working lifetime.
Like the TFSA, the best thing you can do is invest your RRSP in the stock market. By having both a TFSA and an RRSP, you can strategically make withdrawals from your savings in retirement to minimize taxes and maximize the CPP your receive.
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