The Canada Pension Plan (CPP) is a contributory, earnings-related social insurance program. It forms one of the two major components of Canada’s public retirement income system, the other component being Old Age Security (OAS). Other parts of Canada’s retirement system are private pensions, either employer-sponsored or from tax-deferred individual savings (known in Canada as a Registered Retirement Savings Plan).
The CPP program mandates all employed Canadians who are 18 years of age and over to contribute a prescribed portion of their earnings income to a nationally administered pension plan. The plan is administered by Human Resources and Social Development Canada on behalf of employees in all provinces and territories except Quebec, which operates an equivalent plan, the Quebec Pension Plan. Changes to the CPP require the approval of at least 2/3 of Canadian provinces representing at least 2/3 of the country’s population. In addition, under section 94A of the Canadian Constitution, pensions are a provincial responsibility, so any province may establish a plan anytime.
The CPP is funded on a “steady-state” basis, with its current contribution rate set so that it will remain constant for the next 75 years, by accumulating a reserve fund sufficient to stabilize the asset/expenditure and funding ratios over time. Such a system is a hybrid between a fully funded one and a “pay-as-you-go” plan. In other words, assets held in the CPP fund are by themselves insufficient to pay for all future benefits accrued to date but sufficient to prevent contributions from rising any further. While a sustainable path for this particular plan, given the indefinite existence of a government, it is not typical of other public or private sector pension plans. A study published in April 2007 by the CPP’s chief actuary showed that this type of funding method is “robust and appropriate” given reasonable assumptions about future conditions. The chief actuary submits a report to Parliament every three years on the financial status of the plan.
The Canada Pension Plan Investment Board (CPPIB) manages the CPP’s assets on behalf of the CPP, and periodically releases up to date information on assets under management.
CPP Contributions and Benefits
In 2012, the prescribed contribution rate is 4.95% of a salaried worker’s gross employment income between $3,500 and $50,100, up to a maximum contribution of $2,306.70. The employer matches the employee contribution, effectively doubling the contributions of the employee. If a worker is self-employed, he/she must pay both halves of the contribution. The rate of 4.95% has been in effect since 2003.
When the contributor reaches the normal retirement age (a reduced pension is available from age 60), the CPP provides regular pension benefit payments to the contributor, calculated as 25% of the average contributory maximum over the entire working life of a contributor (not just the last 5 years). There are provisions that enable the lower-earnings years in a contributor’s contributory period to be dropped out due to disability, child rearing, or other reasons. CPP benefit payments are taxable as ordinary income. The CPP also provides disability pensions to eligible workers who become disabled in a severe and prolonged fashion, and survivor benefits to survivors of workers who die before they begin receiving retirement benefits. If an application for disability pension is denied, an appeal can be made for reconsideration, and then to the Canada Pension Plan / Old Age Security Review Tribunals or Pension Appeals Boards (POA).
CPP Investment Board
The Canada Pension Plan Investment Board (CPPIB) manages, as of June 30, 2012, over $165.8 billion in investment assets for the Canada Pension Plan on behalf of eighteen million Canadians.Under the direction of then Finance Minister Paul Martin, the CPP Investment Board (CPPIB) was created in 1997 as an organization independent of the government to monitor and invest the funds held by the CPP. In turn, the CPP Investment Board created the CPP Reserve Fund. The CPP Investment Board is a crown corporation created by an Act of Parliament. It reports quarterly on its performance, has a professional management team to oversee the operation of various aspects of the CPP reserve fund and also to plan changes in direction, and a board of directors that is accountable to but independent from the federal government.
Benefit Information Gateway Website Page
The Canada Pension Plan is a contributory, earnings-related social insurance program that provides you with a stable and dependable pension you can build on for retirement. It also provides you and your dependants with basic financial protection if you become disabled or die.
- Canada Pension Plan Retirement Pension: The Canada Pension Plan (CPP) Retirement Pension provides a monthly taxable benefit to retired contributors.
- Canada Pension Plan Disability Benefits: Canada Pension Plan (CPP) Disability Benefits provide a monthly taxable benefit to contributors who are disabled and to their dependent children.
- Canada Pension Plan Survivor’s Pension: The Canada Pension Plan (CPP) Survivor’s Pension provides a monthly pension to the surviving spouse, common-law partner or children of a deceased contributor.
- Canada Pension Plan Children’s Benefit: Canada Pension Plan (CPP) Children’s Benefits provide a monthly benefit to the dependent children of disabled or deceased contributors.
- Canada Pension Plan Death Benefit:The Canada Pension Plan Death Benefit provides a one-time payment to, or on behalf of, the estate of a deceased contributor.
- International Benefits:The International Benefits program provides social security benefits to eligible individuals who have lived or worked in another country, or to the surviving spouse or common-law partner of eligible individuals who have lived or worked in another country.
Deciding when to apply for your CPP retirement pension
Your contributions to the Canada Pension Plan provide you with a stable and dependable pension you can build on for retirement. Your contributions also provide you and your dependents with basic financial protection if you become disabled or die.
You qualify for a CPP retirement pension if you worked, you have made at least one valid contribution (payment) to the Canada Pension Plan, and you are at least 60 years old.
Your retirement pension does not start automatically. You must apply for it.
Do I have to stop work to receive my retirement pension?
You do not have to stop working to receive your retirement pension.
How does my age affect the amount of my pension?
Although the CPP retirement pension was originally intended to start the month after your 65th birthday, you can begin receiving your CPP retirement pension anytime after age 60. Your monthly payment is smaller if you begin receiving it before age 65, and larger if you take it after age 65.
- If you start your pension before age 65: The CPP reduces your pension amount by a set percentage for each month that you take it before age 65, calculated from the time you begin receiving your pension. For example, if you had taken your pension at age 60 in 2011 (60 months before age 65), the reduction would have been 0.5% per month, for a maximum reduction of 30%.
From 2012 to 2016, this early pension reduction will gradually increase from 0.52% to 0.6% per month. This means that if you start receiving your CPP pension in 2016 at age 60, your pension amount will be 36% less than it would have been had you taken it at age 65.
This adjustment is permanent – if you choose to start your pension before age 65, your reduced pension amount does not increase when you reach age 65.
- If you start your CPP retirement pension at age 65: You will get the unadjusted pension amount you are eligible to receive.
- If you start your pension after age 65: The CPP increases your pension amount by a set percentage for each month that you delay receiving it after age 65, up to age 70.
From 2011 to 2013, this late pension increase will gradually rise from 0.57% to 0.7% per month. This means that, if you start receiving your CPP retirement pension in 2013 at the age of 70 (60 months after age 65), your pension amount will be 42% more than it would have been if you had taken it at age 65.
- If you start your pension after age 70: These increases stop at age 70 and there is no financial benefit in further delaying your pension. Note that, in general, Service Canada can only pay retroactive payments of CPP benefits for up to 12 months.
How do I decide when to take my retirement pension?
The decision is yours and depends on your circumstances. Some considerations are:
- whether or not you still earn an income and contribute to the CPP;
- how long you have contributed;
- how much you have contributed and the amount of CPP retirement pension you can expect to receive;
- your other retirement income;
- your health; and
- your retirement plans.
What happens if I don’t work after the age of 60 and delay receiving my pension until I turn 65?
For many in this situation, the extra five years of no earnings will lower the amount of CPP retirement pension payable at age 65. This happens because the period you are expected to pay into the CPP continues until you start receiving your retirement pension. For this reason, you should carefully consider your personal situation before deciding when to start your CPP retirement pension.
Can I get an estimate of my CPP retirement pension before I decide to apply?
Yes. For an estimate of your CPP retirement pension, check your CPP Statement of Contributions. You can view and print an up-to-date copy of your statement by visiting our Web site and using My Service Canada Account.
The Liberal government of Prime Minister Lester B. Pearson in 1966 first established the Canadian Pension Plan. Contribution rates were first set at 1.8% of an employee’s gross income per year with a maximum contribution limit. By the mid-1990s though this low contribution rate increase was not sufficient to keep up with Canada’s aging population. As a result the total CPP contribution rates for both employee and employer together were raised to an annual rate of 9.9 per cent by 2003.
At its inception, the prescribed CPP contribution rate was 1.8% of an employee’s gross income up to an annual maximum. Over time, the contribution rate was increased slowly. However, by the 1990s, it was concluded that the “pay-as-you-go” structure would lead to excessively high contribution rates within 20 years or so, due to Canada’s changing demographics, increased life expectancy of Canadians, a changing economy, benefit improvements and increased usage of disability benefits (all as referenced in the Chief Actuary’s study of April 2007, noted above). The same study reports that the reserve fund was expected to run out by 2015. This impending pension crisis sparked an extensive review by the federal and provincial governments in 1996. As a part of the major review process, the federal government actively conducted consultations with the Canadian public to solicit suggestions, recommendations, and proposals on how the CPP could be restructured to achieve sustainability once again. As a direct result of this public consultation process and internal review of the CPP, the following key changes were proposed and jointly approved by the Federal and provincial governments in 1997:
- Increase total CPP annual contribution rates (employer/employee combined) from 6% of pensionable earnings in 1997 to 9.9% by 2003.
- Continuously seek out ways to reduce CPP administration and operating costs.
- Move towards a hybrid structure to take advantage of investment earnings on accumulated assets. Instead of a “pay-as-you-go” structure, the CPP is expected to be 20% funded by 2014, such funding ratio to constantly increase thereafter towards 30% by 2075 (that is, the CPP Reserve Fund will equal 30% of the “liabilities” – or accrued pension obligations).
- Create the CPP Investment Board (CPPIB).
- Review the CPP and CPPIB every 3 years.
Old Age Security
The Old Age Security pension (or OAS or OAS-GIS) is a taxable monthly social security payment available to most Canadians 65 years of age or older. As of January, 2012, the basic amount is C$540.12 per month. At tax time, recipients with 2010 incomes over C$67,668 must pay back a portion of their Old Age Security at a rate of 15% of net income. This is often referred to as a clawback. The OAS pension is fully clawed back for people with incomes over C$110,878.
A person must apply to Department of Human Resources and Skills Development Canada (HRSDC) and meet the eligibility criteria to receive benefits.
To receive a full OAS pension, a person must meet these conditions:
Category 1 – Lived in Canada for at least 40 years after turning 18, OR Category 2 – Born on or before July 1, 1952, AND between the time the applicant turned 18 and July 1, 1977, the applicant lived in Canada for some period of time, AND the applicant lived in Canada for the 10 years immediately before the application was approved.
If an applicant has not lived in Canada for all of the last 10 years because he/she gave up residence in Canada at some time, an applicant may still qualify for a full pension if he/she meets both conditions below:
1) Lived in Canada for the year immediately before the application was approved, and
2) Prior to these last 10 years, the applicant lived in Canada after age 18 at least 3 times as long as the total of absences during the last 10 years.
If an individual does not qualify for a full pension, he/she may qualify for a partial pension if he/she meets these conditions:
1) Age 65 or older, AND 2) Canadian citizen or Permanent resident (Canada) currently living in Canada, AND 3) Lived in Canada for the last 10 years.
Social Security Agreements
Canada has social security agreements with a number of countries. These agreements may allow a person who has lived in Canada and another country (for example, the U.S.), to count years spent in the other country to qualify for the OAS pension. Note that this is to qualify, and that only time actually spent living in Canada will be counted in determining the amount of the pension.
Guaranteed Income Supplement (GIS)
For low income pensioners who earn little or no other income, the Old Age Security is supplemented by a Guaranteed Income Supplement (GIS), which is considered non-taxable income. The amount of the Guaranteed Income Supplement depends on income, marital status and the age of the spouse in married couples. As of January, 2012, the maximum supplement for a single individual with no other source of income is C$732.36 per month, and C$485.61 per month to each spouse of a married couple.
Old Age Security should not be confused with the Canada Pension Plan, which is a contributory, earnings-related pension paid in addition to the OAS to those who have contributed to it.
Canada Pension Plan / Old Age Security Review Tribunals
Canada Pension Plan / Old Age Security Review Tribunals are independent and mandated to hear appeals of decisions made by Human Resources and Skills Development Canada (HRSDC) on benefits under the Canada Pension Plan (CPP) and Old Age Security Act. (OAS).
Each appeal is heard by three members chosen by the Commissioner of Review Tribunals from a panel appointed by the Governor-in-Council. A review tribunal must be chaired by a lawyer and where a disability benefit is at issue, one panel member must be a member of a prescribed health profession.
Persons appealing to a Review Tribunal are entitled to an oral hearing at a location in Canada that is convenient for them, and may bring fresh evidence to support their case. Decisions made by a Review Tribunal under the Canada Pension Plan can be appealed, with leave, to the Pension Appeals Board (PAB). Review Tribunal decisions under the Old Age Security Act are subject to judicial review by the Federal Court of Canada.