Canada Pension Plan: Understanding CPP

While the Federal government considers increasing the age of eligibility for Old Age Security due to Canada’s aging population and economic challenges, they maintain that our Canada Pension Plan is actuarially sound.

Canada Pension Plan’s chief actuary submits a report to Parliament every three years on the financial status of the plan.  In June 2011 the Canada Pension Plan Investment Board had $153.2 billion in assets under management.

Canada Pension Plan (CPP)

The Canada Pension Plan (CPP) is a mandatory government sponsored pension plan that was established in 1966 under Prime Minister Lester B. Pearson.  The CPP is funded by Canadians that are employees, employers or self-employed.

Contributions are required once you reach the age of 18, and they are no longer required after you reach the age of 70, become disabled, or start receiving a CPP retirement pension.

Under the CPP, monthly pensions are paid to retirees, surviving spouses or common-law partners of deceased contributors, orphans, the disabled, or children of the disabled.

Lump sum death benefits are paid to the estate of deceased contributors.  The amount is dependent on contributions the deceased made to the CPP during his or her lifetime.  The maximum lump sum death benefit is currently $2,500.

Calculating CPP Premiums

Regular CPP premiums for employees are calculated at a rate of 4.95% of earnings above an exemption of $3,500 to a maximum of $48,300 in 2011.  If you make under $3,500 you pay no CPP premiums, and the maximum you pay is based on earnings up to $48,300 – if you earn more than that, you only pay premiums on $48,300.

The yearly maximum contribution is $2,217.60, which is matched by the employer.  Self-employed individuals must make both halves of the contribution.

Applying for CPP

In order to start receiving CPP pension you must fill out an application.  Although it’s not required, the government suggests you apply for CPP pension six months before you want your pension to begin.  Payment of the benefit must be approved by the government.

Applying to receive the CPP is an important step that some seniors are not aware of.  Application kits are available online using the My Service Canada Account.

You can make a request to the government through Service Canada to get an estimate of your CPP retirement income.  The form allows you to choose any two retirement ages from 40 to 70 and to elect any two ages between 60 and 70 for your pension to begin.

CPP Pension Sharing

Under the CPP, spouses can apply to share their CPP retirement pension payments by assigning a portion of the contributor’s retirement income to his or her common-law partner or spouse.

Essentially, the government allows you to decide how much of one contributor’s CPP pension can be shown on the other spouse’s personal income tax return.  The tax savings can be significant, especially if one spouse has been the sole income earner throughout the relationship.

You or your spouse can apply to receive an equal share of the retirement pensions you both earned during the years you were together.  The amount depends on how long you lived together and your contributions to the CPP during that time.

What Age Should You Elect To Receive CPP?

The normal age to start receiving the CPP pension is 65, but you can elect to receive it as early as age 60.  If you choose this route, your pension is reduced by 0.5% for each month that you elect to start receiving your pension before you turn 65.  That’s 6% per year.

You can also elect to delay receiving the CPP pension until as late as age 70.  In this case, you get a premium of 0.5% a month for each month you wait until after you turn 65.

You can’t simply choose to start receiving your CPP pension before age 65.  You’ll need to have stopped working, or have low earnings.  Low earnings are defined as earning less than the current monthly maximum CPP retirement pension ($960 in 2011).

Final Thoughts on CPP

The Canada Pension Plan is a key part of the retirement plan for many Canadians.  Contrary to what some Canadians believe, the CPP appears to be sustainable for the long term.

If you’re approaching retirement, you need to understand the CPP pension and how to optimize the amount you get out of it.  That means looking into pension sharing, and deciding whether to start receiving CPP early or elect to delay receiving CPP.