WOWA’s Canada Pension Plan calculator (CPP calculator) calculates the base CPP pension you would receive each month. You need to enter your birth year and the year you plan to retire. Then, you need to enter your income for each year since you turned 18 until you want to start receiving your pension. We are using each year's maximum pensionable earnings as default. If you have or will earn more than the default value, you can leave it as it is because earnings over this amount won’t affect your CPP.
Canada Pension Plan (CPP) is a contribution-based pension system that, together with the Old Age Security (OAS), constitutes the backbone of the Canadian public pension system. Everyone who works in Canada is legally obliged to contribute to CPP except residents of the province of Quebec. The province of Quebec has opted out of CPP and is instead running the Quebec Pension Plan (QPP), which is quite similar to CPP. The base component of CPP substitutes 25% of the average wage of a Canadian worker.
CPP pension is determined based on the average pensionable earnings from 18 until one starts receiving the CPP pension. Pensionable earning is a portion of one’s earning from work in Canada. This includes both employment and self-employment income. Earnings above the CPP earnings exemption and below maximum pensionable earnings constitute one's pensionable earnings.
A set percentage of one's annual pensionable earnings should be contributed to CPP. The CPP earnings exemption has been $3,500 over the past two decades, while the maximum pensionable earnings increase yearly in line with Canada’s Consumer Price Index (CPI).
In 2023, the maximum pensionable earning is $66,600. The contribution to the base component of the CPP has been 9.9% over the past two decades. Half of this contribution is made by employees, and the other half by employers. Since 2019, CPP enhancement has been phasing in. As of 2023, self-employed workers in Canada are contributing 2% of their pensionable earnings to CPP enhancement. Employees contribute an additional 1%, while their employers also contribute an additional 1%. This brings the total CPP contribution in 2023 to 11.9% of pensionable earnings.
Since one’s 60th birthday, applying for and receiving one’s CPP pension is possible. However, the Canada Pension Plan considers 65 the default age to apply for the CPP retirement pension. One can apply earlier, but they face a permanent reduction in their pension by 0.6% per month. CPP also incentivizes one to postpone applying for retirement benefits by raising your pension permanently by 0.7% per month.
Let us consider someone who has made the maximum CPP contribution from 18 to 60. They will reach 60 in 2023. In the table below, we consider and compare their earnings for starting their pension each year from the age of 60 until the age of 65.
|Amount of Decrease||648.12||526.83||399.66||265.97||131.78||0|
|Extra Income Gained||47,760||44,029.92||37,600.56||28,275.60||15,748.08||0|
So, most Canadians will face the question of when to apply for their CPP pension. Should they start receiving money as early as possible or wait for a larger pension? The answer depends on your situation. Here, we list the most important factors to consider when making this critical decision.
The longer you expect to live, the more important your monthly pension amount, which you can maximize by delaying the onset of your CPP pensions. The shorter you expect to live, the more important the number of monthly payments you receive, which you can maximize by starting your pension earlier.
If the only factor at play was the incentive for delay in receiving CPP pension payments, you could easily simulate retiring at different ages and calculate the total pension you would receive at each age depending on which age you retire.
You might, for example, find that at the age of 85, your total pension would be the same whether you retire at 60 or 70. In this case, if your life expectancy is greater than 85, you would benefit from delaying your pension. If your life expectancy is shorter than 85, you would benefit from starting your pension at the earliest.
This analysis has not taken the post-retirement benefit into account, which favours taking your pension earlier. You can find an explanation of the post-retirement benefit in the last section of this page.
Because of the way CPP benefits are calculated, you might actually be penalized for delaying your CPP pension after your retirement. Because your CPP pension is proportional to your average pensionable earnings, if you retire before starting your pension, some years with zero earnings will be included in your pension calculation.
The general dropout provision, which allows up to 8 of your lowest income years to be excluded from the calculation of CPP pension, would mitigate the impact. However, it is beneficial to use this provision for other years of low earnings.
Canada uses a progressive tax system, which means that higher-income earners are taxed at higher rates. The idea behind this system is to distribute the tax burden more equitably based on one's ability to pay.
The income tax system is divided into tax brackets, each with its own tax rate. As your income increases, you move into higher tax brackets and pay a higher percentage of your income as tax. The federal government and each province or territory have their own set of tax brackets and rates.
Thus, you would pay more taxes if your income is distributed unevenly between different years. So, you can choose a start date for your CPP pension such that your income is smoothed out over different years.
More specifically, if you start receiving your pension while still working, your income will concentrate on the working years when you receive your pension, and you will be penalized by the tax code.
Thus, from a tax planning point of view, it is better to delay your pension until your retirement.
Other factors that can affect your optimum retirement age include: the risk of depleting your personal savings, your level of risk aversion, the level of your retirement expenses, the expected rate of return of your portfolio, and the future rate of inflation.
After your CPP/QPP payments commence, you might continue working or return to work. In such cases, you might opt-in or out of CPP’s Post Retirement Benefit (PRB). If you reside in Quebec, QPP automatically enrolls you in the Retirement Pension Supplement (RPS). Both schemes commence additional payments for life the year following any additional contributions are made.
An individual who has been earning over the maximum pensionable earning since they were 18 years of age would receive the maximum CPP pension by the age of 60. The only benefit they gain from delaying their pension is the actuarial adjustment of 0.6% per month. Such individuals would benefit from commencing their pension as early as 60 and using their contributions after the age of 60 to get PRB.
Individuals with years of low earnings and a lower CPP pension might benefit from postponing their pension.