Money Management, Personal Finance

What is the Canada Pension Plan (CPP)?

by Modern Money

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!

cropped MM Logo No Background.png
About Modern Money

This article is brought to you by the Modern Money research team. The insights, information and guidance that you need to take control from those who understand you best.

You may also like

Attainable Ways to Improve Your Finances in the New Year

Some financial resolutions take considerable time and dedication: upskilling to improve employment prospects, developing a strategy to pay down debt, reducing the fixed costs associated with home and vehicle ownership. But there are also opportunities to improve at the margins with a relatively low degree of effort. Here are a handful of financial New Year’s Resolutions that you can accomplish before the motivation starts to wear off...

What is the Lifetime Capital Gains Exemption (LCGE)?

The lifetime capital gains exemption (LCGE) is one of the most effective ways to reduce how much tax you might owe when you sell a business, farm, or fishery in Canada. Learn how to keep more money from a sale with the LCGE...

Subscribe to Modern Money

Enter your e-mail to receive updates on new articles from Modern Money, the ultimate guide for young professionals.

Don't worry, we won't send you any spam.
Share via
Copy link
Powered by Social Snap