Canada Pension Plan – increasing contributions

Let’s talk about the Canada Pension Plan or the CPP.

What is it?

It’s a government backed retirement plan that provides funds after 65 (or 60 at a lower rate) if you have worked in Canada.  The amount you get is dependent on the amount you contributed through your lifetime, and is a 4.95% deduction off your paycheck along with an equal contribution by your employer.

What You Should Know

CPP maxes out at $1,038.33 currently (2014) and is indexed to the Consumer Price Index, so theoretically it will give you that amount (or it’s inflation adjusted equivalent) when you retire.

However, the CPP is not seperately financed.  All funds currently generated for the CPP goes into general financing for the government and is then used to pay out to current pension earners.  That is, the money you pay in now isn’t set aside for you specifically, it goes into a general pool.

In addition, the CPP is not fully funded though it supposedly is sufficiently funded till 2085.

How Much Do I Get?

25% of your average earnings.   Service Canada (who run the CPP) looks at your average earnings from 18 to 65, dropping out up to 7.5 years of your lowest earning years to calculate your CPP payout.

The maximum ‘allowable’ / calculated earnings was $51,100 in 2013 – if you earned more than that, it wasn’t counted towards the CPP (nor was funds taken for the CPP above that amount) but it did count towards the amount you’d get.

So, most people will definitely get significantly less than the maximum of $1,038.33.

Is Raising the CPP Good Then?

Depends on your point of view.  They’ll take more money from your paycheck now (raising it to 12% total or from 4.95% to 6% off your paycheck), in return for up to a 35% increase in the final payout.

Theoretically then, you could get more when you retire; but the question then is this retroactive? That is, do people who only paid in 9% through their life get 35% payouts? My guess is (and this is political); yes – so that Baby Boomers/etc who never saved get ‘saved’ by the government.  That I don’t agree with…

If not, maybe it’s good.  I still prefer to save money myself, but for a lot of people that might not be what they want.

Is It Going Away?

The important part to note is that while the CPP is theoretically funded sufficiently, there isn’t a separate pool where all CPP contributions are locked away.  It’s just a giant pool of cash which the government pulls from.  So, it’s possible if the government overspends that there just won’t be any money there when it’s needed.

Again, this is a possibility – not a certainty and really depends on numerous factors. However, it’s worth knowing and adding to your own considerations.