The Canadian government provides its citizens with steady retirement sources of income. One such program is the Canada Pension Plan. A crucial step towards retirement is earning CPP benefits by finding out How is CPP calculated?
These calculations will give a prediction on retirement pension. Likewise, CPP calculation gives a clear understanding and working of CPP retirement pension. This CPP is a source of economic stability and security for citizens in retirement.
1. What Is CPP?
The Canadian government introduced three pillars of the foundation for pension plans– CPP(Canada pension plan), GIS(Guaranteed Income Supplement), and OAS(Old Age Security).
These three programs are similar, with minor differences. The government introduced these as a means to provide financial independence during retirement.
CPP is a monthly pension payment to Canada’s senior citizens throughout their lifetime. However, this is a taxable income where a significant amount gets deducted from taxes.
1.1. History of CPP
The Canada pension plan was founded in 1965. It replaced 25% of individuals’ average earnings. Initially, the employee and employers funded this program. This funding scheme is intact to this day, with minor changes over the years.
Throughout CPP’s existence, two reforms have shaped the present-day CPP.
One of the reforms added was in 1997 as more people were approaching retirement age. Therefore, the contribution will decrease with an increase in withdrawals.
For the money to flow, the government doubled the contribution rates. Simultaneously, they established the Canada pension plan investment board.
Canada pension plan investment board was the third funder. The board invested in this scheme along with employers and employees.
The enhanced program was the second reform added in 2016. The initial 25% increased to 33%. However, this is more favourable for the younger generation than previous generations. The increased percentage will provide young investors with more money during retirement.
1.2. Eligibility for Qualification of CPP Contributions
CPP is a mandatory program. All employed and 18+ citizens of Canada must contribute towards this scheme.
There are two things an individual has to fulfill before withdrawing CPP. You must be at least 60 years. During your earning years, you must pay a fair amount of contributions.
1.3. Who Funds the CPP?
Employees and employers fund the Canada Pension Plan. Every month from the paycheck, if you receive more than $3,500, a 5.95% of the payment gets deducted from 2023.
As a part of the CPP payment, the government receives a sum from the employee and the employer. This sum is from the deducted pay from the employee’s salary and the equal share from the employer.
One does not have to contribute to CPP if one falls under the low or no salary category. That is an income lesser than the basic yearly exemption, $3500.
However, there is a limit to contribute. This limit is YMPE, Year’s maximum pensionable earnings. The Canada Revenue Agency founded YMPE. The YMPE’s amount in 2023 is $66,600.
In the case of self-employment, you have to add contributions as an employee and employer.
1.4. How Much CPP Benefit Will One Receive?
The following criteria will help to determine the pension amount you will receive:
1.4.1. Average Earnings
The money earned by an individual when they worked for a living.
1.4.2. Pay Period and the Contributed Amount towards CPP Retirement Pension Amount
Monthly payments and the period of the CPP contributions will determine pension payment.
The age of an individual while withdrawing the CPP payments.
An individual age 65 opting for CPP withdrawal in 2023 will receive a maximum monthly amount of $1306.57. However, the average CPP is $811.21.
To receive a maximum CPP, one has to contribute a maximum amount for a minimum of 39 years.
1.5. Low Earnings Provision
You can request the government to exclude a few expenses. For instance, child-rearing and disability years with the lowest incomes come under the category. You can receive the CPP disability payment for all the disabled years you cannot work. This payment is under disability benefits.
It is essential to submit proof of raising children or a disability to receive benefits. With this proof, the years of support or disability might not be affected by low CPP payout.
2. How is CPP Calculated?
There are several ways you can calculate what CPP you will receive in future. The average CPP payment calculation is the CPP contributions made at least once. You contribute to this CPP contribution while you are working. There are several ways to calculate CPP benefits without struggling through complicated calculations.
2.1. CPP Retirement Income Calculator
Canadian retirement income calculator calculates the CPP retirement pension amount. It is a website that helps you calculate CPP. It provides you with the required details to start with CPP.
Signing up for the CPP Statement of Contributions will give you an idea about the CPP benefits. Under the retirement pension block, you can see the tab, monthly payment. This monthly payment is the money you will receive if you opt for retirement today.
CPP post-retirement benefit and pension payment information is available on this website.
2.1.1. How is CPP Calculated for Estimated CPP Benefits from CPP Statement of Contributions
By filling the details of the date of birth, gender, and monthly income will give you an estimated monthly CPP. This monthly CPP is the pension amount received at age 65.
- You can even provide details to check the month you will receive at the age you plan to withdraw CPP benefits.
- You can set an expected annual retirement pension. Provide an estimated life expectancy option, leading you to advanced questions. These questions are about CPP contributions and statement details.
- You can check for the amount by increasing the CPP contributions for a couple of years ahead, like at the age of 67 or 68. A detailed graph shows the representation of how to calculate CPP contributions.
Further, the website asks more questions. It includes Employer benefit plans, Retirement savings, Other sources of income, and OAS. A detailed graph calculates CPP payments using the Canada pension calculator. With a given set of parameters, the graph will show a rough figure of the amount you will receive.
2.2. My Service Canada Account
Another way to calculate CPP is by registering to My Service Canada Account. It provides you with information and helps you update details. This website gives a close prediction of the amount you will receive post-retirement.
2.3. Other Ways to Calculate CPP
There are calculators to calculate CPP payments developed by the most experienced in the field.
One such is cppcalculator.com. It provides a prediction of the average CPP payments post-retirement. However, this doesn’t include a CPP disability pension or the child-rearing provision.
A few websites to calculate CPP benefits are NeoFinancial and TheMeasureOfAPlan. These websites are capable of calculating accurate CPP payout.
2.4. When to Start Drawing CPP Retirement Benefits?
You can start collecting CPP retirement amounts between the ages of 60 to 70. However, 65 is the default age to collect CPP benefits.
The average CPP payment reduces when you collect a pension before the default age.
This results in the decrement of CPP retirement pension. The monthly retirement pension increases when you withdraw the amount after age 65.
The contributions towards CPP before age 65 result in additional post-retirement benefits.
2.4.1. What Will Happen if the CPP Retirement Pension Is Collected at an Earlier Age?
In mathematical Terms, if you start taking CPP amount at age 6o, there is a monthly decrease of 0.6%. The annual CPP contribution reduces by 36% on your 65th birthday. This percentage of the amount is unrecoverable.
2.4.2. What Will Happen if the CPP Retirement Pension Is Collected POST-DEFAULT Age?
If the amount taken after age 65, suppose at 66, there is a 0.7% monthly increase. This 0.7% monthly increase sums to an 8.4% increase in yearly pensionable income. The more you wait, the merrier!
The collection of CPP benefits depends on you and your requirements. At age 60, you can withdraw your CPP retirement pension if it is crucial. However, if other sources of income are available, you can wait a couple of years to collect a CPP pension.
2.5. What is CPP Disability Benefit?
Sometimes, an individual may not be able to work. For instance, one such scenario is when met with an accident. He is eligible for the Canada pension plan if he contributed before the mishap.
Disabled individual of such sort comes under the CPP disability pension. CPP retirement income is valid for such disabled individuals till age 65.
3. How to Apply for CPP?
Applying for a CPP retirement pension is available online or offline. You can send mail or drop it at the nearest Service Canada location if you prefer offline mode. Online submission is preferable, as the approval time varies between 7 to 14 days.
However, offline means takes 12 days for the approval CPP retirement pension application.
4. How to Maximize CPP Retirement Pension
CPP amounts change in January of every year. The consumer price index(CPI) is the parameter to calculate CPP payments in 2023.
4.1. What is Consumer Price Index?
CPI is a change in the price of goods and commodities over the years. In simple terms, a basket filled with basic amenities required for survival. Those include food, clothing, shelter, transportation, and other essentials. We need money to purchase these essentials.
The base year used for calculation is 2002. The base year is the year used for comparing with the current year. Consider 2002, Canadians supposedly spent $1 to buy the basket, and in 2023 they spent $2.
The basket in 2023 has doubled that of 2002. This increase is the total purchase percentage increase. CPI is also used to measure inflation rates.
4.2. How is CPI Used to Calculate CPP Retirement Pension?
The rate increase for 2023 is the average CPI from 2021 to 2022 and CPI from 2020 to 2021.
Rate Increase = ( CPI from November 2021 to October 2022 ) / (CPI from November 2020 to October 2021)
Using the formula will result in a 6.5% increase in rates. This rate increase will add to the CPP amount if you begin to collect CPP in 2023. This rate increase is a sign of an inflation increase in Canada.
However, if the CPI decreases, the CPP plan act benefit amount will not. This amount will remain the same. The inflation results in an increase in CPI. This increase will give you a maximum CPP retirement pension.
As discussed, you can delay your CPP payments, if possible, for a couple of years. When the CPP amount to receive prolongs, you will get a percentage hike in the amount you collect.
5. How Much CPP Amount Successors Receive After the CPP Contributor Passes Away?
You will receive a one-time down payment of $2500 if the deceased individual paid for CPP.
If the CPP contributor is below 18 years or between 18 and 25, they qualify for the CPP amount. For those between 18 and 25, they must be receiving secondary education to receive the CPP amount.
5.1. Survivor Pension
If the spouse made a CPP contribution during their work life, the partner receives the amount with a deduction. However, a partner with no valid contribution to CPP will receive the amount allocated for the CPP contributor without any deduction.
If the deceased’s partner is over age 65 and the CPP retirement pension will go to the spouse. The spouse will receive 60% of the deceased partner’s CPP amount. If the surviving spouse’s CPP adds to the expired spouse’s CPP, the maximum pensionable earnings should be $1306.57, the maximum CPP per month.
In simple terms, the deceased partner’s CPP + survivor CPP should not exceed $1306.57. If you are below age 65, you can collect 37.5% of the pensionable income from your deceased partner’s CPP. There will be a flat rate that includes the 37.5% income.
6. Is the CPP Pension Plan Sufficient during Retirement?
Before deciding whether the CPP amount is enough for retirement, you must consider a few factors. Retirement age, savings, and other sources of income contribute to your retirement income.
- If you plan to retire early, ensure that you have other ways of income flowing into your pockets. Nevertheless, the flow is irrespective of CPP or additional post-retirement benefits.
- If you are age 65, you will receive a monthly CPP amount and OAS benefit of $1,502.21 monthly and a sum of $18,026.52 yearly. With this income, you become eligible to apply for GIS, which can kick in a couple of hundred dollars.
- If you are free from rent or responsibilities, the amount you receive will suffice for a simple lifestyle. If your pensionable earnings are not enough, you can start saving while you work.
Pension sharing is another benefit of CPP, as you can split the credits with your spouse or partner. This credit splitting divides the CPP income between separated or divorced partners.
Depending on the retirement money, you can save a couple of bucks in your earning years to live a stress-free life during retirement. There are always other backup plans to save up for your retirement. The backup plans include TFSA or RRSP schemes.
7. Old Age Security
This program is the second pillar of pension income. This scheme was introduced in 1952 to give pensions to citizens starting from age 70. Later, the age decreased to 65 from 70.
This money is an average monthly amount given to the elderly irrespective of earnings or contributions.
7.1. Eligibility for OAS
You receive benefits from this program based on the years you lived in Canada.
- A legal resident or a Canadian citizen with a minimum age of 65 is eligible for OAS benefits. In addition, a person residing in Canada for more than ten years from age 18 is eligible for this program.
- On the other hand, you can collect your maximum monthly amount if you retire in a different country.
To summarize, you are eligible to collect the OAS benefits if you lived in Canada for a minimum of 20 years. In other words, a Canadian resident with a 20-year period of proof before the day you decide to move out of Canada.
There is another condition where your work might need you to work from outside the country. For instance, Being in the armed forces, you can count your residency years in another country. In short, living in another country is counted as Canadian residency years.
To receive benefits living abroad you must move to Canada within six months before retirement. This step is mandatory to receive OAS benefits.
7.2. When to Start Withdrawing OAS Amount?
To receive the benefits, you must be of age 65 or older. You can claim these benefits by selecting a preferable date. On the other hand, you can receive them after a month after you turn 65, the default age.
There is an option similar to Canada’s pension plan in delaying the benefits to a maximum of 5 years. With this delay, there is a yearly increase of 7.2%. The maximum monthly amount you will receive from OAS in the first quarter of 2023 is $687.56 between the ages 65 to 74.
OAS scheme is taxable income that the government keeps a tab on the income you earn. When the income exceeds $129,757, you are no longer eligible for this scheme.
7.3. How to Apply for OAS?
The enrollment for this scheme has to be automatically enrolled. In case absence of information, Service Canada will get in touch to fill in the missing details.
You can apply online before a month you turn 64 years old. However, you must reside in Canada while applying for OAS. Inform Service Canada if a spouse expires, is separated or is divorced.
In case of a recipient’s death, the estate will notify Service Canada about the demise.
8. Guaranteed Income Supplement
GIS is the third pillar for receiving pension payments. This program is to help out citizens with pension amounts with low incomes. This scheme came into place in 1967. Initially, it was a temporary CPP phase-in. Eventually, it became a permanent scheme that helps those whose with low income.
8.1. Eligibility for GIS
You must be a Canadian resident age 65 or older and already a part of the OAS program. This program is a non-taxable income, and the amount received is based on the income tax return. This income tax return is the amount you or your family reported as taxes.
You will receive GIS benefits if you earn less than $20,832 individually. You will receive the benefits irrespective of your marital status.
If your spouse receives OAS income, you receive a yearly maximum of $27,552 from the GIS pension scheme. However, if your partner does not receive any OAS income, $49,920 is credited to you.
9. Frequently Asked Questions
9.1. How is QPP Different from CPP?
The Quebec pension plan and the Canada pension plan are similar. As both of them provide pensionable earnings during retirement for their citizens. However, the Quebec pension plan applies to people who work only in Quebec. CPP is for those outside Quebec but within Canada.
9.2. Which of the Retirement Pension Programs is Taxable Income and Non-Taxable?
CPP and OAS are taxable benefits. On the other hand, the GIS scheme is non-taxable income.
9.3. Is Pay Period Exemption Deductible From Total Pensionable Income?
Yes, the pay period exemption is deducted from the total pension payments.
Canada pension plan is one of the retirement income schemes. This CPP helps retired Canadians to live without worrying about money. There are other pension schemes like OAS and GIS that help Canadians with their source of income.
The benefits received from CPP, especially on numerous ways to maximize the CPP amount is a convenient method.
Don’t miss out on the CPP pension benefits that the government offers. On the whole, get to know how is CPP calculated for your knowledge of the pension scheme.