10: The Canada Pension Plan

Hey, remember back in episode seven, when I said that you’re already contributing to a defined benefit pension plan, and it’s the Canada Pension Plan? Did you wonder what I meant?

Don’t worry, you’re not alone. Not many regular people understand what it is, how it works, and what it means for them…but that’s going to change today (for you and anyone you share this episode with).

Why is this important?

The Canada Pension Plan, or CPP, has been around for sixty years, but most of us don’t think much about it except when we notice it on our paycheques, or have to pay it all at once on our self-employed earnings come tax time.

CPP is a defined benefit plan (as in, you know how much you’re going to get in the future, and you have to contribute but don’t control how it's invested), and is designed to replace between 25-33% of the income you earn during your working years, up to a maximum that’s set every year by the government.

It’s completely portable within Canada - that is, it comes with you from job to job, and you and your employer are required to contribute to it. If you’re self-employed, you contribute once as the employee and once more as the employer.

When you die, and if you have a partner, they get a survivor benefit. If you have kids, they get their own children’s benefit until they turn 18 or until they turn 25 if they’re still in school.

If you become disabled before you turn 65 and can’t work, you could get a disability benefit (but that deserves a whole episode for itself).

For lots of people, CPP is a major piece of their income pie when they stop working. It might be for you too. It’s also a payment you have to make with every paycheque, or - if you’re self-employed - in addition to your income tax at the end of the year. Isn’t it important to know where your money is going and when you can expect it back?

When You’re Contributing to CPP

Canada Pension Plan contributions are mandatory on any income you earn once you turn 18 and until you turn 65. After age 65, you can choose whether to keep contributing or not…even if you’re already receiving CPP, you can still contribute more which increases the amount you’ll get the following year (that’s called the Post Retirement Benefit, if you’re interested).

During your contribution years, it might be helpful to think of your income filling up four different buckets: Exempt Money, Basic Money, Additional Money, and Exempt Money: The Sequel.

The first bucket, Exempt Money, is just big enough to fit $3,500. If you earn $3,500 in a year, and no more, you don’t contribute to CPP.

The second bucket, Basic Money, holds $67,800 (that’s dollars $3,501 to $71,300). For every earned dollar that fits into this bucket, you have to pay 5.95% to CPP, and so does your employer. If you’re self-employed, you pay 11.9%, since you’re both the employee and the employer.

The third bucket, Additional Money, holds $9,900 (that’s dollars $71,301 to $81,200). For every earned dollar that fits into this bucket, you and your employer have to pay 4% to CPP.

The fourth and final bucket, Exempt Money: The Sequel, fits every dollar you earn starting at $81,201, and nobody pays any CPP on it at all.

In 2025, the most anyone will have to contribute to CPP is $8,860.20 - that’s $4,430.10 from you, the employee, and another $4,430.10 from your employer (or yourself, if you’re self-employed).

All of these buckets except for the first one get a little bit bigger every year to account for the fact (or sometimes hope) that wages increase and your pension needs to keep up.

Why are there two different kinds of CPP contributions, you might ask? Well, that’s because CPP changed quite a bit starting in 2019. It’s a fascinating story (for a given value of fascinating), and I’ll include it in the show notes for this episode.

What Happens to All That CPP Money?

The Canada Pension Plan is self-funded, meaning it’s not paid for out of the income tax collected by the federal government. Instead, the contributions that we make are paid out to the people receiving benefits, and any extra money is invested.

Every three years, actuaries get all up in CPP’s business to make sure that it’s on track to pay out the benefits it’s promised to for the next 75 years. It passes, every year.

This enormous pool of our collective money–billions of dollars of it–is managed by the Canada Pension Plan Investment Board. If you want to know what kind of investments they’ve decided to make on our behalf, I’ve included links in the resources section of this episode.

When You Start Getting CPP

You get to decide when you start getting CPP. It can be as early as age 60 or as late as age 70. For every month past your 60th birthday you wait, your benefit increases by 0.6% until you reach age 65, and then it starts increasing by 0.7% every month until you start receiving it.

How much you get depends on how long and how much you contributed between age 18 and age 65 (yes, even if you start getting CPP at age 60 - the years between ages 60 and 65 are included in your earnings history as zeros).

Everyone gets at least some of their lowest earning years dropped out of the calculation. For those of us who had kids, and whose average earnings decreased when they were small, those years are also dropped out of the calculation. And if you were disabled and receiving the CPP Disability Pension anytime before age 65, those years are dropped out too.

All of this dropping out means that there are fewer years to divide into a higher earnings history, and generally result in you getting more money.

In 2025, the most anyone can get from CPP if they start receiving it at age 65 is $1,433 per month. This amount goes up every year in line with how much the cost of living increased the previous year, measured by Statistics Canada in the Consumer Price Index, which measures the cost of a group of specific things people pay money for and how it changes over time.

If you want to know how much you might get from CPP, you can order your Statement of Contributions from Service Canada and hire Doug Runchey to prepare a calculation for you, or you can use David Field’s CPP Calculator (that he collaborated with Doug Runchey to create). You can find Doug and David using the links in the show notes for this episode.