Every Canadian 18 or over is required to contribute a percentage of their employment income to the Canada Pension Plan (CPP). For 2013, it is 4.95% on maximum earnings of $47,600 and your employer is required to make matching contributions. Self-employed Canadians need to contribute both the employee and employer premiums for CPP.
Since it is not funded by the government, CPP is not actually a social security program, but a separate self-funded program managed by the CPP Investment Board.
There have been some changes to CPP in the last year. Under the old rules, you could apply for CPP between the ages of 60 and 65 only if you had stopped working or had significantly reduced earnings for at least two months. But your monthly CPP amount was also permanently reduced by 0.5 percent for each month after you started receiving the benefit before 65. So if you opted to take your CPP at age 60, the payment would be reduced by 30 per cent (60 months multiplied by 0.5%) by age 65.
The rule change begun in 2012 means you no longer need to stop working to start receiving CPP; you can apply anytime between the ages of 60 and 65. But the sooner you begin receiving benefits, the lower your pension payments will be, since the penalty will be phased in to 0.6 percent per month by 2016.
Another change requires working taxpayers under 65 to continue contributing to CPP even if they have started receiving retirement benefits. However, these additional contributions will go towards funding a new “post-retirement benefit”.
Once you reach 65, you can now opt to continue contributing to CPP. The additional contributions will also increase your post-retirement benefit. If you do not want to make contributions once you turn 65, you must complete Form CPT30 and file it with your employer.
You can also elect to postpone CPP benefits until 70. For deferring your CPP payment, your benefit amount is increased to 0.7 percent. So if you started to receive benefits in 2013 after deferring them until you are 70, you would see a 42 percent increase in your lifetime benefit.
Remember, CPP payments are fully taxable and are not eligible for the pension income amount. But spouses and common-law partners may be able to split their CPP income if one is in a higher tax bracket. The amount they can split is based on how long they lived together while they were contributing to the plan.
The maximum CPP benefit for 2013 is $1,012.50 per month or $12,150 annually. However, the average benefit for new recipients was only $596.66 per month. If you are relying solely on CPP payments to fund your retirement, you may want to explore some other options. CPP benefits are indexed but are unlikely to fund all your retirement needs.