TORONTO — Paycheque deductions can be an unpleasant surprise for those new to the workforce — a jumble of letters representing wages you can’t immediately collect.
Among them are contributions to the Canada Pension Plan, and though it may not feel like it now, that money adds up over your working life to create a nest egg for retirement.
Here are answers to some common questions about CPP:
What is the Canada Pension Plan?
Every paid worker in Canada, except in Quebec, from freelancers and small business owners to employees of big companies, is automatically part of the national pension plan. It is not possible to voluntarily opt out.
That means you must contribute to the pension fund through a payroll deduction. Employers and employees are both required to pay into CPP, which for most people means your contribution levels are matched by the company you work for.
“Essentially, we’re all paying into this very, very large national pension plan that is professionally managed,” says Ian Calvert, vice-president and principal ofwealth planning at HighView Financial Group.
Who is covered by CPP?
Canadians who earn over $3,500 in ayear are covered under the national pension plan, except for those living in Quebec — which opted out of the federal plan when it was established in the 1960s and manages its own provincial plan instead.
The Quebec Pension Plan works the same way as the national scheme, providing retirement income to workers who pay into the plan during their working life.
The province of Alberta announced last year it’s studying a potential exit from the national pension plan, with the intent of replacing it with its own. Financial details of the move have yet to be determined and it isn’t certain the plan will go forward.
CPP also pays out disability and survivor benefits to qualified individuals.
How much do I pay every year?
For 2024, the basic exemption amount remains the same at $3,500 — anyone making less than this is exempt from paying into the plan. Any earnings over this amount qualify for CPP contributions.
Beginning this year, there are two changes to note.
Essentially, the threshold of the first tier was increased to $68,500. Workers earning up to that amount will pay 5.95 per cent of their income into the pension plan, with the employer matching that figure.
The government also introduced a new, second salary tier for contributions.Workers making more than $68,500 will pay an additional four per cent on the extra amount they make, up to $73,200. This system — which will lead to higher payouts upon retirement — has been phasing in gradually since 2019.
The changes mean that anyone who has paid into CPP since 2019 will see higher benefits when they retire, but Calvert noted that the biggest jump will be for the generation just entering the workforce.
“The goal is that by the time they retire 30 years from now, (pension benefits) could be 50 per cent higher compared to where it is today,” he said.
If self-employed, the worker contributes as both an employee and employer — a combined 11.9 per cent for the first tier and eight per cent on additional income in the second tier.
Where does the money go?
The recurring deductions from your paycheque don’t sit idle. Instead, the arm’s-length fund manager redirects the capital not needed to pay pension, disability or survivor benefits into investments.
The Canada Pension Plan Investment Board manages the money. The fund had net assets of $576 billion as of Sept. 30, 2023.
“The funds are being professionally managed on our behalf to ensure the sustainability of this plan, to ensure that when I get to the retirement date, there’s going to be enough capital there … without jeopardizing the needs of the next generation,” Calvert said.
Like many large pension funds, CPP Investments has holdings in assets such as real estate, private equity and infrastructure as well as bonds andpublicly traded companies.
Is CPP enough to retire with?
Calvert explained CPP forms one of three pillars of retirement income, along with private pension plans and personal savings such as Registered Retirement Savings Plans.
He added CPP plays an important role in retirement planning — it’s a source of secure, stable income, indexed to inflation each year — but not enough to retireon alone.
For 2024, the maximum monthly amount a retiree can receive at 65 is $1,364.60. Not everyone withdraws the maximum amount, which is calculated based on their contributions and years of work. The average monthly amount paid in October was $758.32, the federal government said.
The standard age to retire is 65. If a worker retires before then (the earliest you can start receiving CPP is age 60), their payouts will be smaller. But some may choose to delay it to the age of 70, Calvert said.
“If you delay it, each month, your benefit becomes a little bit higher,” Calvert said, adding there’s no one-size-fits-all when looking to retire.
This report by The Canadian Press was first published Jan. 30, 2024.
