What Is the Canada Pension Plan?

What Is the Canada Pension Plan?

One of the biggest fears that many Canadians have has to do with retirement. Will you be able to retire when you want to? Will you be able to do so comfortably? It’s important for you to do what you can to boost your retirement savings, and it’s important to use all the tools at your disposal.

As a result, don’t forget that Canadians have access to the CPP. In fact, contributions to the CPP are required. As you plan for your retirement, you should certainly shore up your finances with the help of your RRSP, TFSA, and taxable investment accounts. But don’t forget to factor the CPP into your plans.

The Canadian Pension Plan and Your Retirement

The CPP is part of Canada’s retirement income system. Anyone that is is 18 or older and employed must contribute to the CPP. The contribution calculation is based on the employee’s income. This plan applies to all provinces and territories except Quebec, which operates its own similar plan, the Quebec Pension Plan (QPP).

While it seems a little hard that the contribution to the CPP is mandatory, the reality is that too many of us don’t save what we should. The CPP enforces a certain amount of saving so that you at least have something to fall back on during retirement. Chances are that the CPP won’t guarantee a comfortable retirement on its own so you will need to use other tools to build wealth. But it can help you provide the base for your retirement income.

The Canada Pension Plan is a monthly benefit designed to replace 25% of your earnings during retirement. To begin collecting under the CPP you must be 65 to receive your full benefit. It is possible to begin receiving your CPP benefits as early as age 60 if you either stop working in the month before your CPP begins. or make less than the monthly maximum Canada Pension Plan retirement pension payment in both the month before and the month of your first CPP payment.

This isn’t always the best option, however, because by starting to receive your payment at 60, your CPP payment will be 30% lower than if you wait until 65. If you decide that you want to retire early, it usually makes more sense to draw from other income and investment sources and hold off on your CPP if you want full benefits.

On the other hand, you can delay your payment under the Canada Pension Plan until 70 and your payment would be 30% more than what you would have received at 65. Deciding when to begin claiming your CPP benefits is a big deal and depends on your individual situation. Before you make a decision, it’s a good idea to consult with a knowledgeable financial advisor who can help you see how your entire retirement income picture will look — including the tax implications of your decisions.

Your CPP and Non-Retirement Income

The CPP isn’t just for retirement, though. There are two other forms of CPP payment: disability payment and survivor payment. Both of these types of payment recognize that there are situations in which you can’t wait until you are older to begin receiving benefits.

The disability payment can come into effect if a disability leaves you unable to work at any job regularly. It’s designed to help you supplement your monthly income when you can no longer work at the same level as in the past. Disability can be financially devastating, and the CPP can help offset that.

The survivor payments include a one-time payment to the estate of the contributor, as well as monthly payments to the spouse, or common-law partner, and to dependent children. This benefit is designed to help take care of your family in the event of your untimely death.

Realize, though, that CPP disability and survivor payments, like retirement benefits, aren’t designed for total income replacement. Proper insurance is a good idea in order to ensure that your family’s finances aren’t destroyed by unexpected setbacks.

You can apply for the Canada Pension Plan either online or by mail. Make sure you have all the proper documentation when you apply. You can contact the CPP for information about what is needed ahead of time so that your application isn’t slowed down by missing documentation.


  1. Erick

    Hi there,

    You didn’t mention the proposed changes that will start coming into force in 2011:

  2. Tom Drake

    Erick, thanks for pointing that out. The proposed changes do relax a few of the CPP rules. You just picked the topic for Wed’s post!

  3. Imran

    In the OAS article, you wrote that an estimate for CPP+OAS for a couple is $25k and that the max benefit for OAS for a couple is $517x12x2=$12,408 per year. That means that CPP also provides about $12,592 for a couple (or $6,296 per person) each year. In this article, you wrote that CPP is “designed to replace 25% of your earnings.” That would mean that you’re estimating that the average person earns $6,296/0.25=$25,184 per year. Isn’t this a little low? Are my calculations wrong, or did I misunderstand something?

  4. Tom Drake

    Good point Imran, thanks for working out the math I never even thought of! I checked the Service Canada site for the recent average payments, CPP comes in at $501 and OAS at $489. So that’s $990, or $11,880 for an average individual.

    The 25% figure comes from the government. Even though it’s written about the CPP, maybe they meant the entire payment, including the OAS portion? Of course $47,520 might be a bit high for average retirement income. Or it’s possible that the 25% term is based on a quarter of a necessary income, a bit of a marketing term by the government?

  5. Imran

    Thanks for the clarifications, Tom! QPP also provides $863.75, so that’s another $10,365 for Quebecers. For a couple, the total’s already at $44,490. That’s not so bad. Then add DPPs (if any), RRSPs, and moving into a small home (if you don’t want to leave anything for your kids, hehe).

    Maybe you can write a post consolidating all regular sources of income for pensioners.

    I’ve been following it for a few months now, reading every blog entry (using Google Reader). Good job!

    • Russ

      Can you claim both CPP and QPP? I thought the QPP was Quebec’s version of CPP….you can’t have both, can you?

  6. Betty

    How do I apply for my divorced husband’s share of his cpp?

  7. sherry Leigh

    I was approved for cppd in 06 after a brain injury.I now want to earn money via the internet selling things.How much money can I make and still keep my cppd of 824.00 per month?I know I have to declare anything over $400.00 but I am not sure of anything more?

  8. Linda Kerr

    I have been receiving CPP 4 the last yr & a 1/2, but, am still working part time. Up till now I haven’t worried about the hrs because I was not getting that many. Could u please tell me if there is a maximum of hrs in a month that I can work? Thank u very much

  9. Wayne

    I am 63 and began to collect my CPP at age 60 after an early retirement. I began to work short term contract jobs the end of last year and didn’t want to have CPP withdrawn my pay cheque as it won’t be added to what I already receive through CPP payments. My thoughts are if I am paying for something I should receive something in return. For the government to take payments without any intention of providing benefits is criminal. I’m just looking for a form I can deliver to my employer, accountant and revenue Canada to except me from further contributions.

  10. Patricia

    Hi. This is probably a dumb question, but I’m just writing up my will and I’m wondering if I can designate a beneficiary. I’m single so a spouse wouldn’t be in the picture for receiving monthly benefits if I die. Are all those years of contributions just lost then?

    • John

      From what I understand, yes, it all goes back to the plan. Think about all the people who don’t live long enough to collect. CPP will never go broke.

  11. Debbie

    Is it possible to pay into CPP while not living in Canada, and have never lived in Canada to receive payments when I am 65?

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