Public pensions for retired & disabled workers
CPP is a social insurance plan providing income replacement to contributors and their families in the event of retirement, disability or death. It is government-run, but funded by mandatory employee and employer premiums. Premiums are invested by CPP Investments, a body independent of government politics or CPP administration. While CPP is the largest long-term disability plan in Canada, serving both contributors and dependents, the largest component of CPP payments is the retirement pension.
Guiding principles
Historically, CPP was designed to replace 1/4 of a worker’s average earnings, up to the year’s maximum pensionable earnings (YMPE), an annually-indexed dollar ceiling approximating the average national wage. In 2016, enhancements were introduced to eventually move the replacement target to 1/3 of qualifying earnings.
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- The first phase of the enhancements began in 2019 with the premium rate moving from 4.95% in roughy equal annual increments through to its target 5.95% level in 2023.
- Phase two began in 2024, with a 4% premium being levied on income above the YMPE up to the year’s additional maximum pensionable earnings (YAMPE). The YAMPE is set at 7% above the YMPE in 2024, then rises to 14% above YMPE for 2025 and thereafter.
Premium payments
Employers withhold employee premiums in their payroll process, adding an equal amount as its own premium, and remitting the total to the Canada Revenue Agency. Employers claim a deduction for their premiums. Comparatively, employees claim a tax credit for premiums on income up to the YMPE, and a deduction for the additional premium up the YAMPE. Self-employed individuals pay both the employee and employer portions.
For 2024 the employee premium rate of 5.95% applies above the $3,500 exempt income level up to the YMPE of $68,500, for a maximum premium cost of $3,868. The 4% for the addition applies from the YMPE up to the YAMPE for 2024 of $73,200 (a range of $4,700), for a potential maximum additional premium of $188.
The connection between premiums paid and your potential retirement pension
Contributors earn credits for premiums paid during working years, from age 18 until the age when the pension begins. In concept, credits are spread across the number of working years to arrive at an average.
In practice, there are adjustments for presumed and actual absences from work, mainly:
General dropout
Takes out the equivalent of up to eight years, to acknowledge schooling, unemployment or other reasons
Child rearing provision
For actual time away from the workforce spent caring for children up to age seven
Disability exclusion
Periods during which a person is disabled, per CPP definitions
Over-65 dropout
May replace relatively low earnings before age 65 with higher earnings after age 65
Your actual retirement pension depends on the age when you begin
For 2024, the maximum annual pension is $16,375 at age 65. Age 65 is what CPP considers to be the standard age, but it’s not a legal requirement. A retirement pension may begin as early as age 60 or as late as age 70:
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- The pension is reduced 0.6% for every month taken before age 65, which is a 36% reduction at age 60. For 2024, this works out to a maximum of $10,480.
- The pension is increased 0.7% for every month taken after age 65, which is a 42% increase at age 70. For 2024, this works out to a maximum of $23,252.
Complementary components of the CPP, outside of the core retirement pension
Disability pension
Unable to work at any job on a regular basis due to severe & prolonged disability
Survivor’s pension
Spouse or common-law partner of a deceased CPP contributor
Children’s benefit
Dependent of a disabled/deceased contributor, to age 18, or age 25 if full-time student
Post-retirement benefit
Augments pension of CPP retiree who continues to work and pay premiums
Post-retirement disability benefit
When a disability arises after starting retirement pension
Death benefit
A one-time $2,500 payment to the estate or dependent of a deceased CPP contributor