Your CPP Benefit is Getting Better – But When Should You Take It?

The first part of a two-stage enhancement to the Canada Pension Plan (CPP) began on January 1, 2019, when most Canadian employees, employers, and self-employed people started making additional CPP contributions. Anyone making contributions after January 1, 2019, will receive an increased amount of CPP retirement pension, post-retirement benefit, disability pension, and survivor’s pension when they retire. The second part launched in January 2024.

Canadians make CPP contributions based on what the Canada Revenue Agency (CRA) calls “annual pensionable earnings”. Employers, employees and the self-employed are all required to make contributions based on a per centage of an individual’s pensionable earnings. The amount of income up to which contributions are due is called maximum pensionable earnings.

• The base maximum pensionable earnings limit has risen annually for many years and is $68,500 for 2024.
• The basic earnings exemption amount, on which no contributions are owed, has been the first $3,500 of income for many years.
• From 2003 to 2018, employees contributed 4.95 per cent on their pensionable earnings and employers made an equal contribution.
• From 2019 to 2023, as part of the first stage of the CPP enhancement, the base contribution rate gradually increased by 1 per cent from 4.95 per cent to 5.95 per cent.
• In 2024 the base contribution rate is 5.95 per cent for both employees and employers. Self-employed individuals are responsible for making both contributions.

Additional CPP contributions: 2024 to 2025 and beyond

The second stage of the CPP enhancement began on January 1, 2024, and consists of additional CPP contributions for those earning above $68,500 annually. These individuals will make additional CPP contributions up to what CRA calls a “second earnings ceiling”. The “first” earnings ceiling is the base pensionable earnings limit discussed above ($68,500 in 2024). The amount of the new, second earnings ceiling is:

• $73,200, or approximately 7 per cent higher than the first earnings ceiling in 2024 .
• Approximately 14 per cent higher than the first earnings ceiling in 2025 and following years.
• Employees and employers are required to make a second, additional CPP contribution on pensionable earnings between the first and second earnings ceilings at a rate of 4 per cent.

Self-employed individuals who earn more than the first but less than the second earnings ceiling will contribute 8 per cent of their net business income that is above the first earnings ceiling. Employees making less than the first earnings ceiling will not make additional contributions beyond the existing base of 5.95 per cent, which will continue to be matched by their employers. If you are self-employed and make less than the first earnings ceiling contributions will remain at 11.9 per cent.

Carefully consider when to start your CPP benefits

The monthly CPP cheque you receive is the result of a calculation involving your age and an average of your earnings during the working years when you contributed. However, CPP allows for certain periods, such as when you had low earnings due to child-rearing or disability, to be excluded from the calculation to avoid penalizing you. The baseline age for calculating and receiving CPP is 65 but you can begin collecting it as early as 60 and as late as 70. Fewer than 1 in 10 Canadians wait until they’re past 65 and only 4 per cent of Canadians are expected to wait until 70.

When to start your CPP benefits is an important financial decision with lasting consequences that should be integrated into your broader retirement income planning. The amount you receive is adjusted according to your age when payments start and delaying your CPP past 65 can have lifelong financial benefits. According to a 2020 report from Toronto Metropolitan University’s (TMU) National Institute on Ageing and the FP Canada Research Foundation, waiting until age 70 can more than double the monthly amount you receive than if you begin at 60. Whenever you begin, CPP benefits last for life and are indexed to inflation.

The financial impact of starting before or after 65

Age 65 is the pivot point – your monthly payment shrinks by 0.6 per cent for every month before 65, amounting to 7.2 per cent less annually and a maximum reduction of 36 per cent if starting at age 60. Conversely, if you begin collecting CPP after 65 your monthly payment grows by 0.7 per cent for every month past that birthday, amounting to an 8.4 per cent boost for every year you wait, with a maximum increase of 42 per cent by the age of 70.

The 2020 TMU report estimated that people who start at 60 instead of waiting until they turn 70 could potentially lose as much as $100,000 in retirement income. Late life expenses, often healthcare related, can rise significantly and foregoing higher income as we age can be a potentially costly choice. So if you can afford to wait without impairing your lifestyle – either by drawing more from other income sources, including personal savings, or by working longer – choosing to wait can be a good strategy to increase predictable, permanent retirement income unaffected by movements in investment markets.

Each case is unique

Experience tells us that life is much more than just data on spreadsheets. While some start their CPP at age 60 simply because they can, others may have more complicated reasons for doing so. Immediate health problems or a family history of health issues that might limit expectations of a long retirement can be key factors. A more recent consideration is inflation. The significant increase in the cost of living since 2022 can make a new source of steady income indexed to inflation compelling, particularly for the 60 per cent of working Canadians without a workplace pension plan. And the number of Canadians who expect to retire with some form of debt is rising. Each of us has a unique financial profile and so the possible impact over time of when we begin our CPP pension will depend on personal circumstances.

A key part of retirement income planning

The important process of deciding when is best for you can be guided by working with your advisor to develop a comprehensive retirement income plan. We spend much of our adult lives with an asset accumulation mindset vs. decumulation, investing vs. consumption. This perspective is critical for securing financial security in old age but as retirement approaches we need to reorientate towards a new reality of the end of employment income and the start of retirement income.

This requires understanding the role that each component of our financial profile can play in achieving the goal of retirement income adequacy and security. Developing that starts with a foundation of predictable cash flow to support our core expenses in retirement. This is where delaying CPP benefits to lock in higher lifetime monthly income can make sense. Research from the TMU National Institute on Ageing reveals a changing retirement paradigm for Canadians defined by longer life expectancies and reduced family support. Add in the rising healthcare costs that often come with longer lives and the consequences of giving up enhanced late-life financial security – such as that offered by delaying CPP benefits – could begin to weigh heavily as we age.

Consult with your financial advisor and other specialists (including tax) to ensure the choice of when to start your CPP benefits is integrated into a broader retirement income plan designed for your unique circumstances. Once taken, the decision is permanent.