Understanding Your Retirement Benefits: Part 1 – CPP

Imagine celebrating at your retirement party without a clue as to how much you can expect to receive in pension income. It sounds incredible, but many people who will end their career in a few years are in just that situation.

When you work for an employer you receive your salary, but once retired your income can come from multiple sources. You need to know how much you will receive from these sources.

Related: Necessity Tetris – Retirement Income Edition

Since CPP is one of the cornerstones of retirement income, this is where I will begin.

A brief history of the CPP

The Canada Pension Plan (CPP) is a national public plan that covers people in all provinces except Quebec. It was created in 1966 by the government under Lester B. Pearson. Quebec wanted their pension monies to be under their control and so became the only province with its own program.

When CPP was created the contribution rate was 1.8% of pensionable earnings to be shared by employers and employees, and self-employed persons were on the hook for the full amount. The first deductions were so minuscule that they were unsustainable to fund the retirement costs of the baby boom generation who were just beginning their working years. Also, life expectancies were starting to increase substantially.

The contribution rate rose steadily until now where it stands at 9.9% of pensionable earnings (between $3,500 and $53,600 per year). The required contribution increases each year because of indexing.

Retirement benefits

CPP offers several types of payments, but for most people the most important payment is the retirement benefit. You can begin to draw it as early as age 60 or as late as 70.

Your CPP pension is based on how much you have contributed to the plan and provides income for life.

Related: An easy way to estimate your CPP benefits

The amount is indexed to inflation, so your payment will gradually increase each year. In 2015, the maximum benefit for a sixty-five-year-old is $1065, or $12,780 per year. However, most people don’t receive the maximum because their income was below the ceiling (MYPE) and/or they don’t have enough contribution years. The average monthly payment is $618.59.

Even those who qualify for the maximum are replacing only a small portion of their income. The 2015 annual payment was only about 24% of the year’s maximum pensionable earnings. Those earning more than the maximum pensionable earnings receive no additional credits so the percentage of income replaced by CPP lessens the higher a person’s earnings.

Drop out years

The number of low-income years that can be dropped out of the pension calculation increased to 17% in 2014, which will increase your monthly payment.

Related: CPP’s Child Rearing Dropout Provision

Someone who starts contributing to the CPP at age 18 and continues until 65 has a career span of 47 years. Since the retirement benefit is calculated on “average career earnings,” the more low-income years you record over that period, the smaller the payment.

Under the 17% rule, eight years can be dropped. Workers can also apply to exclude any low-income years when they were the primary caregivers of their children under the age of seven. Excluded as well are any months when a person received CPP disability payments.

Receive benefits early or late?

You can increase the amount of your pension by postponing your application. As of 2014 your CPP payment will increase by 0.7% for every month you delay drawing benefits after you turn 65. You must begin drawing benefits by age 70. If you wait until then, you’ll receive 42% more than if you had applied at 65.

Conversely, if you apply early you’ll pay a penalty of 0.58% a month in 2015, increasing to 0.6% in 2016. At that point, a person who starts receiving benefits on her 60th birthday will receive 64% of the benefit she would have received if she had waited until 65.

Related: 8 retirement mistakes to avoid

If we apply those percentages to the 2015 maximum retirement benefit (not counting yearly indexing), the person who waits until 70 would get $1512.30 per month. Someone who begins to collect at 60 would receive $694.38 per month.

Although there are many calculations around about the mathematical break-even points of taking your CPP benefits at various ages, the benefits are designed to be actuarially neutral for average life expectancy.

So, when does it pay to take CPP benefits early?

  • If you expect your life expectancy to be reduced due to poor health.
  • If you retire before age sixty-five and had several no- or low-income years over and above the allowed drop out years there may be no advantage to waiting.
  • Your income is low enough to qualify for GIS.

Why delay taking benefits?

  • If you expect to have a longer than average life expectancy.
  • You plan to continue working and earn a good income.
  • Your benefit amount is tiny and you want to beef it up.

Quite simply though, if you need the money, you need the money. Many planners suggest taking the money as soon as possible, but a lot depends on your personal circumstances.

Taking benefits while working

In the past, once you began drawing CPP benefits you no longer had to make contributions – you were CPP exempt. Now, anyone between 60 and 65 who draws CPP benefits while continuing to work will be obligated to carry on making contributions to the plan.

Related: Do we need to beef up our CPP?

From these extra contributions you will receive a small annual post-retirement benefit (PRB) to a maximum of $26.63 that will be added to your retirement pension in January, even if the maximum CPP benefit amount is already being received.

Contributions after 65 are voluntary until age 70.

Pension sharing

Retired couples can now pool the portions of their pensions that they earned while they were together. The total payout won’t change, but couples may get to keep more of it if splitting the pension puts more income in the hands of the spouse in a lower tax bracket.

Unlike other pension splitting rules however, the CPP pension split can only be done on a 50-50 basis. Couples must agree to this in writing.

Related: Do you support a guaranteed minimum income for Canadians?

Also, CPP credits earned by divorcing partners during their time together from 1977 onward may be subject to division.

Survivor benefits

When changes were made to the CPP, the formula for calculating combined retirement and survivor benefits after age 65 was altered. As a result the combined benefit is capped at the maximum retirement pension, adjusted based on the survivor’s age.

So, someone already receiving the maximum CPP benefit will not receive any survivor benefits on his or her spouse’s death, no matter how much the deceased had paid into the plan.

Non-working spouses are entitled to 60% of the spouse’s pension, and if you are widowed more than once, only one survivor pension will be paid.

Final Thoughts

In planning your retirement income needs you need to discover how much you will receive from CPP. Many people assume they will get the maximum because that is the amount used in many income calculators and articles.

Related: Can I afford to retire?

Go on line to My Service Canada to obtain your most recent CPP statement of contributions. Check your current CPP entitlements and get some estimates of your future benefits with their calculators. If you prefer the personal touch, just give them a call at 1-877-454-4051.

If you’re still with me, you should soon have some understanding of how much you will receive in CPP benefits at various ages. Jot these figures down in your retirement income planner. Next time, I will discuss the other government income support programs – OAS and GIS.

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  1. Heather on August 26, 2015 at 6:26 am

    Marie, thanks so much for posting this series. Many Financial Planners have little understanding of CPP, OAS, GIS…..the focus is on Investments such as RRSP’s. I am 6 years away from 65 and expect to be a low income senior due to taking many years out of the work force to raise my children. Post divorce, I am now scrambling to make up for the lost years of earning. For people such as myself RRSP’s are the wrong investment vehicle. I’m considering cashing out my meager RRSP’s, taking the tax hit now and moving the money into my TFSA to prevent the impact on the anticipated GIS.

    • Boomer on August 26, 2015 at 3:14 pm

      @Heather: I believe that if you know where your income is coming from and how much to expect, you’ll be in a better position to make decisions regarding RRSP/RRIF and TFSA investments.

      Good luck in your future efforts.

  2. Olliver on August 26, 2015 at 6:39 am


    First of all as always great information, thanks!
    My first question is in regard to your comment about CPP not including Quebec residents. I live in Quebec and have requested and received from ‘My Service Canada’ the amount I will be receiving when I reach 60 from my CPP. Why do you suggest the pension plan is a national public plan that covers all people except in Quebec?
    Second question; even if I don’t need my CPP until age 65 I calculate the amounf I will receive at age 60 vs. 65 over 5 years to be significant. This money invested could be worth more than waiting until 65 and receiving my full amount. Is this something you can comment on and provide your perspective?

    Thanks again,

    • Boomer on August 26, 2015 at 3:27 pm

      I’m sorry Olliver. I had no intention of dissing Quebecers.

      As I mentioned, Quebec wanted to run its own pension program – the Quebec Pension Plan (QPP) – and it performs in a similar way to CPP. Usually this program is referred to CPP/QPP.

      Some advisers recommend taking CPP at age 60 because of the time value of money – i.e. $1 today is worth more than $1 in the future.

      You are suggesting that if you invest the reduced benefit for 5 years, that amount could supplement your benefit at age 65+ to be equal to, or more than, the amount your would actually receive if you waited to that age.

      In my head I’m thinking that would not be the case, but I have not done the math so I can’t comment with certainty.

      • tom on August 27, 2015 at 12:54 am

        I’ve done the math, and IF one invests the money with a return greater than 2%, you actually come out with more money if you collect CPP earlier and invest everything compounding, then if you started later. So my opinion is that your heath is not a determining factor in the decision.

        • Boomer on August 27, 2015 at 9:48 am

          @tom: I’m interested. Show me your calculations.

          • Tom on August 30, 2015 at 11:48 pm

            Can i send you a spreadsheet attachment somehow

  3. PaperBoyz on August 26, 2015 at 7:54 am

    Excellent information. I consider myself financially literate and I am a successful investor, but as I approach 60 and that first decision point, I find myself unsure of the best path. I suspect I shall engage a (fee-for-service) financial planner to run through the options. Unfortunately a key factor is how long I expect to live, a sombre consideration! My mom died in here early 70s, my Dad in his mid-80s. When I try those online life-expectancy calculators, I find I could live to challenge your average kelp-eating Okinawan or have been dead for eight years already! Sheesh.

    By the way, it’s “minuscule” (based on the idea of “minus”), not “miniscule” (based on the idea of “minimum”).

  4. Boomer on August 26, 2015 at 3:35 pm

    @PaperBoyz: I know what you mean about longevity. My parents are 86 and 91 so that would suggest a longer life expectancy – but I could pick up some deadly virus on my travels and be a goner earlier – you just don’t know.

    I do mean minuscule – extremely small or unimportant (Oxford dictionary).

  5. siraj on August 27, 2015 at 5:57 am

    Average Break even year is 81 to 84 years.

  6. Robb Engen on August 27, 2015 at 7:13 am

    Check out this chart, sent to me by pension expert Doug Runchey. It shows the break-even age for taking your CPP at age 60 through 70 – https://boomerandecho.com/wp-content/uploads/2015/08/CPP-retirement-pension-breakeven-calcs_Max-CPP.pdf

    I highly recommend that anyone who’s struggling with this decision consult Doug to help you make the best decision. Here is the service he provides – http://drpensions.ca/dr-pensions-services.html

    • Lawrence Eddy on November 24, 2020 at 7:17 pm

      Hey Robb, I agree completely. Doug Runchey is an amazing resource for us Pre/Post retirees to assist us in the overwhelming decision making process around when to take our CPP benefits. Doug simplifies it down to the straight #s. But you still need to guess on how long you will live. I’ve chosen “100”. It seems like a nice round number and medical science seems to be on my side. I told my kids…”DON”T pull the plug cuz if I’m still breathing the checks will just keep on rollin’ in.” Based on this decision and Doug’s awesome math, I’ve chosen to wait until age 70 to start my CPP. Mainly because my DB pension has no COLA guarantee. So my OAS and CPP both have COLA and their combined total will make up 40% of my annual income. I’ve been using up My RRSP $ to supplement my income until age 70. Having a guaranteed income during this Pandemic has reduced my stress level significantly; further enhancing my “100” age target.

  7. helen7777 on August 30, 2015 at 10:56 am

    Great series! I look forward to the next articles. I’d
    also like to see Tom’s calculations. As well, I think I need help with how to read the chart included in the above comment by Robb Engan. Glad to learn of the existence of DRPensions.ca

  8. Ginette on August 30, 2015 at 1:31 pm

    Excellent informative article with very useful follow up in the comments! Thanks!

  9. boomer on August 31, 2015 at 9:52 am

    @tom: Thanks for responding. Send your spreadsheet to our email (Contact) and we will share it with our readers. I’m sure they will appreciate the information.

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