What is the Canada Pension Plan and how it can (and can’t) support your retirement
Updated: January 13, 2025
If you're a Canadian thinking about retirement, you’ve likely considered the role of the Canada Pension Plan (CPP) and how it would help you with your expenses.
According to a recent survey from CPP Investments1, 61% of Canadians fear running out of money in retirement. The survey also cited that Canadians feel they need $900,000 in retirement savings to retire, a figure that has gone up 29% in the last year.
While Canadians are stressed about affordability and inflation, the report pointed out how Canadians can feel confident about receiving CPP payouts to cover a portion of their expenses when they retire. That’s because the last report from The Office of the Chief Actuary of Canada in 2022 determined that the CPP is sustainable for at least the next 75 years.
After working hard for your entire career, you don’t want to find out that you can’t enjoy your golden years because you don’t have enough money saved up to handle your expenses or to live your desired lifestyle. You’ll want to take some time to figure out how much you can receive from CPP to determine the amount that you’ll need to supplement with other savings strategies, such as your RRSP portfolio or other investments.
Even though CPP provides a reliable income stream for retirees, it’s often insufficient to cover retirement expenses. This is why it’s important that you work with a financial advisor or take the time to run the calculations on your own to determine how much money you’ll want to save to retire comfortably.
What is the Canada Pension Plan?
The Canada Pension Plan is a mandatory government pension plan for all employed Canadians over the age of 18 that started in 1965 to help with retirement expenses. The CPP is designed to protect Canadians who contribute against any losses to their income caused by retirement, disability or the death of a spouse.
The monthly taxable payment is designed to be a portion of your retirement income, combined with a pension plan and other savings. The CPP payout was originally supposed to cover about 25% of your pre-retirement income, but the CPP Enhancement was introduced in 2019 so that you could contribute more to your CPP to increase your pension amount to up to 33% of your pre-retirement income.
What’s the purpose of CPP?
It’s essential to point out that the main purpose of CPP is to provide a partial replacement income for retired Canadians. Even the maximum Canadian Pension Plan amount (more on this later) isn’t enough to cover most of your bills. The official website even states that your CPP benefits should supplement your retirement income.
Building your retirement income
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The key benefits of CPP
The key benefits of the CPP are retirement income, disability benefits and survivor benefits.
Once approved for the CPP, you’ll receive the monthly income for the rest of your life. Many Canadians will rely on the Canada Pension Plan and Old Age Security to help cover a percentage of their retirement expenses, ranging from living costs to increased medical bills.
How does the Canada Pension Plan work?
Let’s cover the CPP basics, so you know what to expect and can begin to plan accordingly.
CPP contributions explained
As of 2024, employees over 18 in Canada earning over $3,500 annually must pay into the CPP. Contributions are based on your earnings, and the amount is deducted from your paycheque. You and your employer split CPP contributions, the amount of which depends on your income. If you earn over $68,500, you’ll have to contribute the maximum amount.
The maximum CPP contribution amount varies annually, but in 2024, it’s $3,867.50 or 5.95% of your salary (minus a $3,500 exemption), depending on which amount is higher for both employees and employers. Self-employed people are responsible for paying both the employer and employee contributions since they don’t have an employer, with the maximum CPP contribution being $7,735.
How CPP rates are calculated
Your CPP rates are calculated based on the following factors:
- The age at which you decide to begin collecting your benefits
- The amount of time and the amount of money you contributed to the pension program
- Your average earnings through your career
The amount you receive from CPP will depend on when you start accepting your benefits. For those who started collecting CPP payouts in July 2024 at 65, the average monthly amount was $815, with a maximum of $1,364.60. While you would qualify for the maximum at 65 in a perfect world, the CPP will consider the three factors mentioned above. That means there’s a chance that you could earn a figure around the average amount if you didn’t contribute the maximum amount during your entire career.
When should you start receiving CPP?
CPP rates are determined by the age at which you start collecting the benefits.
For example, if you start collecting CPP at the age of 60, you could lose up to 36% of your pension because CPP payments are reduced at the rate of 0.6% for every month from your 60th to your 65th birthday.
However, while you may lose out on future benefits, you may need immediate financial assistance at 60.
If you don’t require immediate access to your funds, you could receive 42% more from your CPP if you wait until 70, compared to someone who started collecting at 60.
It’s worth mentioning that CPP benefits are adjusted annually for inflation, with a 4.4% increase taking effect in January 2024. This means that during the years when you delay your CPP payments, inflation is factored into your future payments.
Canada Pension Plan eligibility and application process
This next section will review the CPP eligibility and application process.
The CPP eligibility criteria is as follows:
- You must be at least 60 years old
- You must have made one contribution to the CPP
There isn’t a minimum amount of time that you’re expected to work and contribute into the CPP before you get to apply as long as you meet the eligibility.
How to apply for CPP
It’s important to note that you must apply for CPP, as it doesn’t automatically kick in. You can apply online or in person.
Here are the steps if you want to apply for CPP:
- 1.
Ensure you qualify. To qualify for your CPP retirement pension, you must be 60 years old and have made at least one contribution to the CPP. If you’re in Quebec and contributed to both the CPP and QPP, you must first apply to the QPP.
- 2.
Determine when you want your CPP payments to start. Take some time to research when you want to start collecting your pension. You can start collecting when you qualify, when you turn 65, or on any specific date of your choosing.
- 3.
Decide how you’re going to apply. You can apply online through your My Service Canada Account. If you can’t apply online, you could print out a paper copy and mail it in or bring it to your closest Service Canada Centre.
- 4.
Submit your application.
- 5.
Review your application status. You can check your application status online or contact Service Canada.
Factors impacting your CPP start time
There are a few factors to consider before choosing when to start taking CPP:
- Your financial situation. If you’re struggling financially around 60, you may want to tap into this resource to alleviate some stress from your life.
- Your health. If you’re in strong health and can live past 75, you may want to wait to start collecting your CPP to maximize your earnings.
At the end of the day, none of us have a crystal ball, and figuring out the perfect time to collect CPP benefits can be challenging. You have to do your best to make an informed decision based on the information you have available to you.
How much does Canada Pension Plan pay?
This number is the one thing on your mind as you try to figure out the role of this income stream in your retirement plan. The average monthly payment for the CPP was $815 as of July 2024. For 2025, the Canada pension plan increase will reach the maximum monthly amount of $1,364.60 if you start your pension at 65.
Calculating your estimated CPP benefits
You can calculate your own estimated CPP benefits by using the online calculator. Those who contributed to the CPP for at least 39 years, from 18 to 65 can expect to receive the maximum monthly amount of $1,364.40 at 65. Most others will earn an average amount of $815 or so, but it’s difficult to give an exact figure as there isn’t a one-size-fits-all solution.
The role of CPP payments in your retirement plan
You’ll want to take the time to learn about other investment options so that you don’t rely on the CPP to cover your expenses. As you can likely tell from a quick glance, $815 isn’t enough to survive monthly. This means you’ll want to look into robo-advisors and other investment options to ensure you have the funds to live your desired lifestyle in your golden years.
Your CPP benefits should be relied on to assist with your retirement income. The pension plan was originally designed to replace about 25% of your average workplace earnings as a retiree. This means that you should plan accordingly by ensuring that the other 75% of your income that needs to be replaced comes from other sources, which can include:
- An employer-sponsored pension plan that should replace a significant portion of your workplace earnings
- Your RRSP account, where you invest in growth stocks or index funds throughout your career
- A TFSA account that provides you with steady income through dividend payouts
- Other investments, including any property or business-related ventures into which you allocated money
The key message is to remember that your CPP will only supplement a portion of your retirement income, so you’ll want to work with a financial advisor so that you can cover the rest of your income through other sources.
How to boost your retirement savings beyond CPP
If you want to feel financially secure in retirement, you should combine CPP, Old Age Security (OAS), personal savings and an employer-sponsored pension plan.
Old Age Security (OAS) is another federally sponsored retirement program, but you don’t have to contribute to it. The OAS is based on how long you’ve lived in Canada and the amount you earned. The maximum monthly payment as of October 2024 for those between 65 and 74 is $727.67, increasing by 10% to $800.44 monthly after you turn 75.
As a retiree, you can improve your financial situation by not relying on one significant stream but on multiple sources that add up. For example, you’ll want to combine your RRSP, TFSAs and employer pension plans to cover your retirement expenses. While you may save on work-related expenses, new costs could emerge as you figure out the next phase of your life, especially if you want to start traveling more.
How to start investing to grow your retirement nest egg
You should start planning and investing for retirement at an early age to benefit from compound interest. You can start investing in index funds, ETFs or robo-advisors to help you grow your retirement nest egg.
Is the Canada Pension Plan enough for your retirement?
Unfortunately, the CPP isn't enough to cover your expenses; it’s designed to supplement your income along with other sources.
The average retirement expenses, based on data from the 2019 Survey of Households, showed that Canadian couples over 65 were spending an average of $48,453. It’s crucial to mention that inflation has been rampant since 2019 and that housing can be a significant expense for many.
However, another popular strategy for calculating retirement income needs is the 70% rule, which dictates that you’ll need to earn 70% of your pre-retirement income in retirement for 25 years. If you're earning $100,000 a year, you’ll have to make $70,000 in retirement, which won’t be covered by your CPP and OAS.
A TFSA is another popular option for retirement income because withdrawals from it are tax-free, unlike those from your RRSP account. Using money from your TFSA before other sources can lower your retirement tax burden and minimize OAS clawbacks.
Figuring out your retirement expenses
Calculating your personal retirement gap can help you determine how far off you are and improve your savings. If you compare average retirement expenses vs typical CPP and OAS payments, you may find that there’s a substantial gap. For example, let’s say you need $70,000 to sustain your retirement lifestyle, and you receive the maximum CPP and OAS benefit at 65.
This means that you would receive $727.67 and $1,364.60 monthly, which is $2,092.27 monthly or $25,107.24 annually. This amount is sufficient to cover some of your expenses in retirement, but everyone has a different lifestyle and you may want to look into other investments to close this gap.
Based on the most recent calculations from Statistics Canada, the average retirement savings for Canadians between the ages of 45 and 54 was $41,998 in RRSPs. This amount wouldn’t last long in retirement, so you’ll want to start working with a financial advisor to ensure that you have enough saved up for your retirement.
How to calculate your total retirement income with CPP
If you’re unsure about how much money you’ll have coming in from CPP, you can play around with a retirement calculator. It’s crucial that you take the time to calculate your CPP, OAS and personal savings to estimate your total retirement income.
Retirement income considerations
When planning your retirement income and expenses, you must factor in inflation, rising health care costs and potential changes to your lifestyle. For example, you may want to move into a retirement community and this could come with a significant increase to your housing expenses. Inflation also can’t be ignored as it causes price increases, and affects daily purchases including everything from fuel to groceries.
Retirement income calculators
If you’re confused about figuring out the math, you can play around with one of the calculators to get a clearer picture of your retirement needs so that you’re not fumbling. The official website recommends that you set aside 30 minutes to run the calculations to get a proper estimate.
Here are the documents you’ll want to have handy:
- Your CPP Statement of Contributions or QPP Statement of Participation
- Financial details about your employer’s pension if you have one
- Your recent RRSP statement if you’ve invested in this account
- Any other statements from accounts that will provide you with monthly retirement income, such as annuities or foreign pensions
You’ll want to ensure that your calculations are as accurate as possible so that you can start planning your retirement accordingly. You don’t want to find out too late that you didn’t save up enough to enjoy your post-employment life.
Canada Pension Plan dates and rate increases
The next dates for CPP payments are:
- November 27, 2024
- December 20, 2024
- January 29, 2025
- February 26, 2025
- March 27, 2025
- April 28, 2025
- May 28, 2025
- June 26, 2025
- July 29, 2025
- August 27, 2025
The Canada Pension Plan annual adjustment increase goes into effect in January each year based on the current economy. Rate increases for your CPP payments are linked to inflation to ensure that the amount is tied to increased living expenses. Experts are currently expecting a 3% increase to CPP benefits based on current available CPI data.
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Martin Dasko has been helping millennials make sense of their finances without missing out on life since 2008. Martin started his financial writing career as a business major in Ryerson when he realized that there was so much school didn't teach us about managing money. Martin covers topics ranging from investing in real estate to trying to build your credit score without letting life pass you by.
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