Introduction: What is the Canada Pension Plan (CPP)?
The Canada Pension Plan (CPP) is a contributory, earnings-related social insurance program in Canada that aims to ensures that all eligible Canadians have a basic financial cushion to rely on during their retirement. In addition to providing retirement pensions, it also provides disability benefits, survivor’s pensions and benefits for children if the contributor has passed away or becomes disabled.
How Does the CPP Work?
The CPP is a mandatory contribution program for Canadians aged 18 and above that are earning more than $3,500 annually. Both employers and employees play a part in the CPP, as a certain amount from each pay cheque of an employee is allocated to CPP, with the employer matching the amounts. Self-employed individuals, however, cover both the employer and employee portions themselves.
When it comes to the benefits received from CPP during retirement, several important factors come into play. The most important factor is your contribution history. The more consistently and generously that you contribute to CPP over your working career, the higher the eventual pension will be in your retirement. The current maximum retirement benefit is adjusted periodically, taking into account factors such as inflation and changes in the average wage. For reference, it’s currently $1,364.60 a month for those that receive CPP at 65 and receive the maximum amount. The current average monthly amount paid for a new retirement pension (at age 65) in January 2024 was $831.92. Your individual situation will determine how much you’ll receive up to that year’s maximum.
How are CPP Funds Invested?
The CPP funds are managed by the CPP Investment Board (CPPIB), which operates at arm’s length from the government. The CPPIB invests the funds in a diversified portfolio of assets to generate returns while managing risk appropriately. This portfolio includes equities, government and corporate bonds, real estate, infrastructure and other investment vehicles – both in Canada and internationally. The objective is to maximize returns while safeguarding the fund’s long-term sustainability in an effort to ensure that CPP will be able to meet its existing and future obligations to its contributors and beneficiaries.
Why is the Canada Pension Plan Important?
CPP is crucial for a few reasons. It serves as a foundation for retirement planning, ensuring that Canadians have some measure of financial security when they are no longer earning a regular income. It also reflects a societal commitment to support individuals who have contributed to the economy throughout their lives and are no longer earning a regular income. Also important is that it provides support for those who face unforeseen circumstances such as a disability or the loss of a family member, as CPP benefits can provide a safety net to assist with their financial situation.
Although CPP can be used as a backstop in your retirement, for most people it will not be enough in their retirement. Because of that, it’s important that you save and invest (especially during your high-earning years) so that you can have your own nest egg for your eventual retirement.
For tips and resources on saving and investing for your retirement, click here to check out the Investing section of our website!
