What is Canada Pension Plan (CPP)
The Canada Pension Plan is one of three levels of Canada's retirement income system, which is responsible for paying retirement or disability benefits. The Canada Pension Plan was established in 1966 to provide a basic benefits package for retirees and disabled contributors. If the recipient dies, survivors receive the plan's provided benefits.
BREAKING DOWN Canada Pension Plan (CPP)
The Canada Pension Plan pays a monthly amount, which is designed to replace about 25 percent of the contributor's earnings on which initial contributions were based. It is indexed to the Consumer Price Index. There are several rules governing the amount an individual will receive upon retirement or disability. This amount is based on the person's age and how much he or she 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.
CPP is roughly equivalent to the U.S. Social Security program. People residing in Quebec contribute to and receive the Quebec Pension Plan (QPP), not the CPP.
Recent Reforms to the Canada Pension Plan
The Trudeau Government and its provincial governments have worked to improve the Canada Pension Plan, in order to provide working Canadians with more income in retirement. These changes were principally motivated by the declining share of the workforce that was covered by an employer defined-benefit pension plan, which had fallen from 48 percent of men in 1971 to 25 percent 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.
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 in over a period of seven years, starting in 2019. When fully mature, the enhanced CPP will provide a replacement rate of one third (33.33 percent) of covered earnings, up from the 25 percent provided prior to the enhancement. Additionally, the maximum amount of income covered by the CPP will increase by 14 percent 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 33 to 50 percent higher pensions, depending on their earnings over the years.