What is the Canadian Pension Plan?

A pension is a regular payment to a person that is intended to allow them to subsist without working. This usually takes the form of a retirement pension, though it can also describe disability pension/benefits. In Canada, every member of the working population over 18 years old has to contribute to the Canada Pension Plan (CPP). The amount each individual has to contribute is directly linked to the salary they earn. The CPP is therefore an earnings-related social insurance program. The Government invests this money and returns it to individuals as monthly payments when they retire, or become unable to work for health reasons, or to a designated third party in the event of the individual’s death. Essentially each contribution increases an individuals ‘credit’ with the Government and will increase the benefits they are likely to receive. The Government has a website covering the benefits of the CPP, including the current average monthly and one-off benefits available. It categorises these benefits as:

1. Retirement pension (currently an average of around $500 per month);
2. Disability benefits (which include benefits for disabled contributors and benefits for their dependent children); and,
3. Survivor benefits (which include the death benefit, the survivor's pension and the children's benefit).

The province of Quebec is the only province that seperates a slightly different system, the Quebec Pension Plan.

Disability benefits include a monthly disability benefit to eligible contributors, and a monthly contributors’s child’s benefits to children under 18 or between 18 and 25 and in full-time attendance at a recognized institution.

Survivor benefits include lump sum death benefit to a designated third party (an individuals estate, survivor or next of kin etc), a monthly survivor benefit to an eligible spouse or common-law partner, or a monthly benefit for children under 18, or between 18 and 25 in full-time attendance at a recognized institution.
As stated earlier, the amount you contribute to the CPP is directly related to your salary, or net business income after expenses if you are self-employed. This is the only income that is considered. In 2006, the contribution percentage was 4.95% for employed individuals, and 9.9% for self-employed individuals. Contributions only have to be paid however on a set portion of income (your ‘pensionable’ earnings). In 2006, this was earnings above $3,500, and below $42,100. The same percentage (4.95% or 9.9%) will be taken from each paycheck regardless of the cumulative amount earnt, therefore, any overpayments will be refuned to an individual through the normal annual tax return process.

The only individuals exempt from making contributions from their salary are those already receiving a CPP disability or retirement pension, or those still working beyond the age of 70. A benefit of the CPP is that your employer will match the contributions you make, doubling your retirement ‘credits’. The exception to that is self-employed individuals who must find the total amount themselves, hence the higher contribution percentage of 9.9%.

In the majority of cases, an individual will sign a form on commencemnt of employment allowing their employer to automatically deduct the CPP contributions from their salary, and there is nothing else to do.

In order to receive any of the three types of benefit (retirement pension, disability benefits, or survivor benefits), you must apply for them in writing in order to have your application approved by CPP. The retirement pension can be available as early as 60, and does not require continuous contributions to have been made, for example, there may be periods of time where an individual is unemployed or outside of the country for an extended period. The contributions made up until the application to start receiving benefits are all considered, and as little as one contribution is all that is required for benefits to be received. Benefits can sometimes be formally shared by spouses or common-law partners, which is also true even if that relationship no longer exists, for example, contributions or ‘credits’ accumulated by a married or common-law couple can be divided for the period when that relationship was in existence, regardless or their present domestic circumstances. ‘Credits’ can also sometimes be accumulated by a Canadian living in a different country for a period of time, due to a Social Security Agreement, which are agreements the Canadian Government has arranged with specific countries. Including the contributions an individual made to the ‘other’ country’s social insurance system, may help them to qualify for additional benefits or meet minimum requirements for them in Canada.

The information above is aimed at providing a useful overview of the CPP. It is also recommended that individuals read the relevant Government website on the topic, particularly in Quebec.

The CPP is therefore a basic compulsory pension plan, providing a starting point for retirement saving. With an increasing cost of living, longer life expectancies, and increased expectations for the standard of living during retirement, however, many individuals opt to contribute to additional pension plans (see ‘Types of Pensions’). Some individuals may also be eligible for the Old Age Security (OAS) pension, which provides additional benefits to eligible low-income seniors.