What is the Canada Pension Plan (CPP), and Is It Enough to Retire On?

The Canada Pension Plan (CPP) is a prominent pillar of Canada’s social welfare system, designed to provide financial assistance to retirees, those who are disabled, and families of deceased contributors.  Below, we look at how the program works and what it means for investors saving for retirement.

Understanding the Canada Pension Plan (CPP)

The Canada Pension Plan (CPP) is designed to replace a portion of your income when you retire.  The amount you receive depends on how much and for how long you contributed to the plan during your working years.

Here are some core elements of the CPP, highlighting how the program works:

Contributions: Both employers and employees must contribute a portion of the employee’s earnings to the CPP.

Self-employed individuals contribute both the employee and employer portions.

The contribution rate and maximum contribution amount are set annually.

Benefit Calculation: The benefits an individual can receive are determined based on their earnings and contributions made over their working life.

The formula considers the number of years one has contributed and the amount contributed.

Eligibility: Individuals can start receiving retirement pension benefits at age 65, though they can opt to begin as early as 60 (at a reduced rate) or as late as 70 (at an increased rate).

To qualify for the CPP, one must have made at least one valid contribution to the plan.

Tax Implications: CPP benefits are considered taxable income, so recipients must report them on their income tax return.

Benefiting Beyond Retirement

Notably, CPP can help eligible Canadians beyond supplementing retirement income.  The following are examples of other instances in which this is the case:

Disability Benefits: Provided to those who have made sufficient contributions and cannot work due to a disability.

Survivor’s Pension: Offered to a deceased contributor’s surviving spouse or common-law partner.

Children’s Benefits: Provided for dependent children of disabled or deceased contributors.

Inflation Adjustment: CPP benefits are adjusted annually to account for inflation, ensuring that the purchasing power of the benefits is maintained over time.

These benefits are available to nearly all Canadians, as the CPP operates throughout Canada.  The sole exception is Quebec, which has its own parallel program, the Quebec Pension Plan (QPP). It’s structured to work in conjunction with other personal savings, employer-sponsored pension plans, and Old Age Security (OAS) to help provide financial security during retirement.

Can You Retire on CPP?

Whether the CPP alone is sufficient for a comfortable retirement varies greatly among individuals, depending on their lifestyle, expenses, and other personal circumstances.  With cost-of-living rapidly rising across the nation, in most instances, the answer is no.  Housing, food, and transportation have simply become to expensive.

Many financial experts and sources highlight that relying solely on CPP and Old Age Security (OAS) may not provide a comfortable standard of living in retirement. It’s often suggested that individuals should have other savings, investments, or pension plans to supplement these government benefits.

The notion of retirement income sufficiency isn’t “black and white,” as it largely depends on personal circumstances and financial needs. Some individuals may find government pensions adequate if they have low living expenses, while others may find them insufficient, especially if they have higher living expenses or unexpected costs in retirement.

Therefore, it’s advisable to consider additional savings and investment strategies to ensure a comfortable retirement alongside the benefits provided by the CPP and OAS.

Should Canadians Contribute to Additional Retirement Savings?

Absolutely.  The CPP is designed to supplement income during retirement years – not to function as a primary means.  With that being the case, Canadians should take every means to contribute to a Registered Retirement Savings Plan (RRSP) or other retirement savings vehicles as well. Here are several reasons why:

Insufficient Coverage: The CPP is designed to replace only a portion of your pre-retirement income. As stated, the average monthly amount for new retirement pensions at age 65 was $772.71 as of June 2023, which may not be sufficient for many retirees to maintain their standard of living.

Increased Financial Security: Having additional savings in an RRSP or other retirement accounts can provide a higher level of financial security. It also gives you more flexibility to manage your finances in retirement.

Tax Benefits: Contributions to RRSPs are tax-deductible, which can lower your taxable income and potentially result in a tax refund. This tax-deferred growth can significantly benefit your long-term savings.

Diversification: Diversifying your retirement savings across different types of accounts and investments can help manage risk and potentially increase your overall returns.

Inflation Protection: Additional savings can help protect you against inflation, which can erode the purchasing power of your CPP benefits over time.

Unexpected Expenses: Having additional savings can also provide a financial cushion for unexpected expenses such as medical emergencies, home repairs, or other unforeseen costs.

Lifestyle Goals: If you have specific lifestyle goals for your retirement, such as traveling, purchasing a new home, or pursuing hobbies, additional savings will be necessary to fund these goals.

Employer Matching: Some employers offer matching contributions to retirement savings plans, which can significantly boost your savings.

Personalized Investment Choices: RRSPs and other personal retirement savings accounts allow for personalized investment choices that can be tailored to your risk tolerance and financial goals.

Estate Planning: RRSPs and other retirement savings vehicles can be part of your estate planning, providing a means to pass assets on to heirs.

Considering the above factors, contributing to an RRSP or other retirement savings vehicles can be a smart financial strategy to ensure a comfortable and financially secure retirement in addition to the benefits provided by the CPP. As always, it is advisable to consult with a financial adviser to develop a retirement savings plan that meets your individual needs and circumstances.

Is CPP In Danger of Being Depleted?

The sustainability of the Canada Pension Plan (CPP) has been discussed for years, and some fears about it running out have been expressed. However, the CPP is designed to be a sustainable program over the long term.

The funds contributed to the CPP are managed by the Canada Pension Plan Investment Board (CPPIB), which invests in a diversified portfolio of assets to ensure the plan’s sustainability.

Moreover, the CPP undergoes regular actuarial reviews to ensure its long-term financial sustainability. It’s advisable to keep an eye on updates from government sources regarding any changes to the CPP’s structure or funding status.

What Happens if a Province Leaves the Plan?

If Alberta decides to leave the Canada Pension Plan (CPP), it must provide written notice and draft legislation to establish an Alberta pension plan. This new plan would need to start accepting contributions beginning in the third year following the year in which notice is given and then provide comparable benefits to the CPP. If Alberta were to give the required three-year notice to quit the CPP, it would be entitled to $334 billion, or about 53% of the national pension plan’s pool, by 2027​.