Understanding how the Canada Pension Plan (CPP/QPP) works

There are 2 main federal government pensions in Canada: the Canada Pension Plan/Quebec Pension Plan and the Old Age Security pension. At Elizz, we are often asked questions about government pensions and benefits for seniors. This blog focuses on the Canada Pension Plan/Quebec Pension Plan. Learn about eligibility criteria, when you can apply for this pension, things to consider in relation to timing -when to start this pension if you are eligible- and how much you can expect to receive. Understanding how the Canada Pension Plan/Quebec Pension Plan (CPP/QPP) works is critical to financial planning for retirement years.

What is the CPP/QPP?

The federal government’s intention with the Canada Pension Plan (in Quebec, called the Quebec Pension Plan) was to help Canadians plan for retirement, with the original strategy to replace ¼ of an individual’s working earnings. Employers contribute a matching amount each year. Self-employed people can also contribute, paying both the employer and employee contribution.

In 2025, the government strategy will be adjusted, increasing the premiums so that the CPP retirement pension will eventually replace 1/3 of an individual’s average workplace earnings.

As it turns out, CPP/QPP and Old Age Security (OAS) are a primary source of retirement income for many Canadians. Workplace pensions have been on a steady decline. Only 37% of Canadians have a workplace pension, leaving 63 % of Canadians without this retirement income.

Canadians nearing retirement without a workplace pension plan have median savings of only $3,000. To state that the CPP/QPP and Old Age Security (OAS) pensions are critical for people’s retirement living is an understatement!

Eligibility

You only receive CPP/QPP if you worked in Canada and made contributions to the CPP Program (or as the result of receiving credits from a former spouse or common-law partner at the end of the relationship).How much you will get each month is based on how much you contributed over the years while employed, and the age at which you start receiving your pension. The earlier you start your pension, the lower the monthly amount.

Unlike the Old Age Security Pension, you are eligible to receive 100 % of your CP/QPP when you reach the age of 60 (or as late as 70 years of age).  Most Canadians start this pension at age 65. Once you start it, this monthly pension continues for the rest of your life.

When to take your CPP/QPP: 60? 65? 70?

There is some debate whether it is better to take it earlier (age 60). If you take it at age 60, it amounts to a 36 % reduction in income compared to if you start it at age 65. If you delay CPP past 65, you will receive 8.4 % more each year that you delay (up to a maximum of 42 percent more if you take CPP at age 70).

Carefully explore all the different factors , such as your health and life expectancy, and your personal savings and other pensions (work pension) before you make your decision about when to take it.  Making the calculations is part of making an informed decision.

How much pension will I receive each month?

To receive the maximum benefit, an individual will have to have contributed to CPP/QPP for 40 years. If you take CPP at age 65, it is based on your best 39 years of earning (and your best 35 years if you take it at 60).

In 2021, the maximum monthly benefit is $1203.75, but note that the average monthly benefit is less than $700 ($689.17 to be exact).

Want an estimate of how much you will receive? Either call Service Canada at 1-800-277-9914 or login to My Service Canada account (if you don’t have an account, you will have to create one). The federal government also provides a retirement income calculator.

Other things to know

• You have to apply for this pension (and it can take up to 4 months to process the application)
• CPP/QPP pension benefits are taxable income
• You can continue to work to work while receiving your CPP/QPP
• While the QPP mirrors the CPP in many ways, there are some differences, particularly with contributions and enhancements
• There are tax-saving opportunities for couples, if both receive CPP/QPP
• There are survivor benefits for CPP/QPP
• If you are unable to continue to work because of a mental or physical disability, you may also be eligible for a CPP disability pension.

Will the money be there when I turn 60/65/70?

I have heard people worry out loud about whether the CPP will be there when they turn 60, 65 or 70 or will the fund be drained. The short answer is yes, it will be there! The CPP fund is managed by a Board which runs at arms- length from both federal and provincial governments and current estimates are that it is sustainable for at least the next 75 years, which covers anyone reading this blog!

Understanding how the Canada Pension Plan/Quebec Pension Plan works is critical to making financial plans for retirement years.

Any surprises for you in relation to how the CPP/QPP system works? Let us know.