Canada Pension Plan (CPP): Overview, How to Apply, FAQs

What Is the Canada Pension Plan (CPP)?

The Canada Pension Plan is one of three levels of the Canadian government's retirement income system, which is responsible for paying retirement or disability benefits. The Canada Pension Plan was established in 1965 to provide a basic benefits package for retirees and disabled contributors. If the recipient dies, survivors receive the plan's provided benefits.

Understanding the Canada Pension Plan

Nearly all individuals who work in Canada are eligible to contribute toward and receive benefits from the Canada Pension Plan, or CPP. The CPP is a deferred income retirement vehicle that has been in place since 1965 when it was introduced as a complement to Old Age Security.

Standard benefits are reserved for those who reach the full retirement age of 65; however, there are provisions for people between the ages of 60 to 65, those with a chronic disability, and survivor benefits for those who lost someone before they reached retirement age.

Taxes

In every province except Quebec, which has its own Quebec Pension Plan (QPP), the CPP taxes wages in a manner that is split between the employer and the employee, although the net effect is to reduce employee wages by the combined taxable amount. Taxes on wages begin at age 18 and end at age 69 even if the individual worker has already begun receiving benefits. In general, CPP tax rates and income thresholds are lower than those of the U.S.'s Social Security system; corresponding benefits also tend to be significantly lower.

Those taxed Canadian wages are placed into a trust fund managed by the CPP Investment Board, which in turn invests the funds in stocks, bonds, and other assets. These assets included private and public equity holdings, as well as real estate.

When individuals reach retirement age, their benefits are determined based on the number of years they contributed to the required minimum amounts. To qualify for the maximum benefit, they must not only have contributed to CPP for 40 years but also have contributed a sufficient amount in each of those years.

The Canada Pension Plan pays a monthly amount, which was designed to replace about 25% of the contributor's earnings on which initial contributions were based, but in 2019, the monthly maximum increased to 33.3%.

It is indexed to the Consumer Price Index. Several rules are governing the amount an individual will receive upon retirement or disability. This amount is based on the person's age and how much they contributed to CPP while working. CPP benefits are considered taxable income. This is why some households elect to share the income, which can reduce taxes.

How To Apply for CPP

CPP benefits are not sent to anyone, even those with eligibility, until an application to receive them is filled out and submitted. If an application is denied, an appeal can be made to the Canada Pension Appeals Board. Those living in Canada but residing in Quebec are not eligible for CPP benefits since the provincial government of Quebec has opted out of the program. Instead, Quebec offers the Quebec Pension Plan.

Before applying, Canadian citizens need to have their Social Insurance Number (SIN) and banking information close at hand. If you wish to take advantage of pension sharing, you must have your spouse or common-law partner's SIN as well. You must also provide your children's SINs and proofs of birth if you plan to request the child-rearing provision on your application.

Don't apply until you're sure that you're ready to start soon. The maximum time you can apply before the pension starts is six months.

To apply for the Canada Pension Plan, you can complete the application online unless you fall into one of the categories that require you to fill out a paper application and either mail it in or bring it to the Service Canada Centre closest to you, with various other documents, as specified by the application information.

If you do fill it out online, there are two steps to the process:

1. Complete your application online and submit it electronically.
2. Print out the signature page of the application, sign it, and mail it to Service Canada.

Reforms to the CPP

The Trudeau Government and its provincial governments have worked to improve the Canada Pension Plan to provide working Canadians with more income in retirement. These changes were principally motivated by the declining share of the workforce covered by an employer-defined-benefit pension plan, which had fallen from 54% of men in 1976 to 37% by 2011.

Additional motivation was provided by the Ontario provincial government, which launched the Ontario Retirement Pension Plan, a supplementary provincial pension plan intended to begin in 2018; however, this plan was eventually replaced by the CPP and never taken into effect.

These enhancements to the Canada Pension Plan will be fully funded, meaning that benefits will slowly accrue each year as individuals work and make contributions. Additionally, the enhancement of the Canada Pension Plan will be phased over a period of seven years, which began in 2019. When fully mature, the enhanced CPP will provide a replacement rate of one-third (33.33%) of covered earnings, up from the 25% provided prior to the enhancement.

Additionally, the maximum amount of income covered by the CPP will increase by 14% by 2025 (projected by the Chief Actuary of Canada to be $79,400, compared to the projected normal limit of $69,700 in the same year in the 28th Actuarial Report on the CPP).

The combination of the increased replacement rate and increased earnings limit will result in up to 50% higher pensions, depending on their earnings over the years.

CPP vs. Social Security

The CPP is constantly compared to the U.S. Social Security program, but there are some key differences. The main ones are that the U.S. is concerned about the long-term sustainability of the Social Security program, while Canada is not concerned with the CPP.

Social Security payments tend to be much larger than CPP, but it is important to remember healthcare in old age can be extraordinarily expensive in the United States.

The taxes you pay into the systems differ as well. While employees in the U.S. pay 6.2% to Social Security, their neighbors to the north pay a slightly lower 5.7%. If you are self-employed in either country, you are responsible for paying the employer portion in addition to your own.

In the U.S., you can take Social Security as early as 62, while in Canada you must be 65 (barring extenuating circumstances.

The single largest difference though is in the amount of a monthly payment. In the U.S., the largest monthly payment you can receive is $4,194 in 2022. In 2023, the amount is approximately $4,550. This assumes that you wait to file for Social Security until you are 70. In Canada, the maximum is CAD$1,253.59. When converted to dollars, that's less than $1,000 per month.

The Bottom Line

The Canadian Pension Plan, or CPP, is the main government-sponsored income tool used by retirees in Canada. They may have other retirement accounts to draw from, but the CPP quietly accumulates over your working life into a pension that, unlike the U.S.'s Social Security system, shows no sign of future insolvency.