Canada Pension Plan Explained
Who Makes Contributions
Contributions to the CPP are made through payroll deductions for employees and self-employed individuals. Employers also make contributions on behalf of their employees. The amount you and your employer contribute is based on your earnings up to a maximum annual limit set by the government. These contributions are pooled into the CPP Investment Fund.
How Much Are CPP Deductions?
Employees are responsible for paying 5.95% of their gross salary, that is, their income before taxes, towards CPP.
Employers, that is, the boss, has the responsibility to match the 5.95% on a 1:1 basis.
This means that a total of 11.9% of gross payroll, or CPP payments made to the government amount to $119 for every $1,000 of payroll or salary earned by employees. There is an annual maximum. For Ontario in 2023, the maximum CPP contributed is $3,754.45 each by the employee and the employer.
Self-Employed Individuals are responsible for paying both the Employer and Employee CPP, which will be 11.9% of their profits up to a maximum of $7,508.90 in 2023.
What's the Max CPP I Will Receive When I Retire?
To receive the maximum CPP payment requires making 39-years of maximum contributions between age 18 and 65. If you are born in 1958, are 65 years of age today. and you succeeded in reaching the 39 year threshold in each of the past 39 years, then you would have contributed a total of $66,433. Self-employed individuals would have contributed a total of $132,866. This would mean an average of $1,703 or $3,406 contributed on an annual basis, respectively.
The maximum CPP that a retiree the age of 65 can receive is $15,679 as of January 2023. Assuming that you will live until 82, the average expectancy for Canadians, and accounting for a 2% inflationary increase, that means thet you will receive a total of $313,769 over 17 years of retirement.
For employees, this would mean about 5X your initial investment, and 2.5x for self-employed workers. Of course, these calculations are basic and do not take into account inflationary and economic factors, but it should give you a rough idea of what you can expect with the Canada Pension Plan (CPP)
