# How is CPP contributions working?



## gibor365 (Apr 1, 2011)

I just checked mine CPP estimate payment on service canada website...
It says that maximum anyone can get is $1,015 monthly.
However, if I already have estimated $800 at age 65, so in several years I'll reach maximum of $1,015
The question what goona be after:
1. I will stop contributing to CPP from my paycheck?
2. I will continue to pay CPP, but won't get any return when retire?


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## Spudd (Oct 11, 2011)

Good question. Dogger will be able to answer for sure, but my guess would be it's option 2.


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## gibor365 (Apr 1, 2011)

I tried to find out on the Web, but couldn't find any info....
If it's option 2, it's sux  Why I should pay for nothing?! Also, I understand that if I move to US or other country, I won't be contributing to CPP, but I'll get maximum when retire.....

Another question, if this max amount $1,015 and my estimate amount are increasing every year? per inflation %? discretion of the government?


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## OptsyEagle (Nov 29, 2009)

The number the CPP program gives you assumes that you will continue to contribute until age 65. In other words, you currently have not obtained a benefit of $800 starting at age 65.


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## gibor365 (Apr 1, 2011)

OptsyEagle said:


> The number the CPP program gives you assumes that you will continue to contribute until age 65. In other words, you currently have not obtained a benefit of $800 starting at age 65.


Are you sure? My understanding was that is I stop contributing now, when i reach age of 65 , I gonna get those $800. How they can know what will be my future contribution?
Also in this case it's practically impossible to get $1,015 maximum.
My wife always contributes maximum... when she will be 65, she will be paying maximum CPP contribution for 41 years! And service canada website writes that "If you were 65 today, you could receive a monthly retirement pension of: $810.09". In this case person should contribute CPP maximum for more than 50 years to get those $1,015!!!


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## Spudd (Oct 11, 2011)

Actually, OE must be right. Mine says I'll receive the maximum benefit, but I've only been in the proper workforce for 15 years. From 18-25, I was a student so my earnings were very low, then I started full-time work at 26. So maybe right now my record looks like 7 years of low contributions and 15 years of full contributions. They must be assuming I'll keep making full contributions until 65. 

So I ran the numbers in the CPP retirement calculator, and told them I'd make <$5000 per year from age 43-65, my benefit went down from $1012 to $600 per month.


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## Ihatetaxes (May 5, 2010)

In my 18th year of maxing, over 15 years to go to taking early benefits at 60 and the website says:

The maximum retirement pension monthly amount at age 65 for this year is: $1,012.50

If you were 65 today,
• you could receive a monthly retirement pension of: $883.07 

If you apply at the age of 60,
• you could receive a monthly retirement pension of: $565.16 

If you apply at the age of 70,
• you could receive a monthly retirement pension of: $1,253.96


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## fraser (May 15, 2010)

My understanding is that to receive max. CPP at age 65 you need to have something like 37 or 39 years of maximum contributions between age 18 and age 65 It is certainly more years that what you project. 

This is just one reason why average CPP payments are well below (I think by half) of the maximum amounts.


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## gibor365 (Apr 1, 2011)

fraser said:


> My understanding is that to receive max. CPP at age 65 you need to have something like 37 or 39 years of maximum contributions between age 18 and age 65 It is certainly more years that what you project.
> 
> This is just one reason why average CPP payments are well below (I think by half) of the maximum amounts.


Yeah, unfortunately I think you are right.... if now this website state my estimate CPP at $800 and I won't work (contribute) for 1 or 2 years, this amount will decrease.
Also using calculator i figured out that in order to get maximum $1,015 , person need to earn at least $51,100 (in current $) from age 18 until 65 , it means for 47 years! Not wonder that this is practically impossible to have. I came to Canada in mid 30's , so if even i earn from 35 to 65 $100,000 annually, I won't even close get maximum CPP


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## Eclectic12 (Oct 20, 2010)

fraser said:


> My understanding is that to receive max. CPP at age 65 you need to have something like 37 or 39 years of maximum contributions between age 18 and age 65 It is certainly more years that what you project.
> 
> This is just one reason why average CPP payments are well below (I think by half) of the maximum amounts.


Maybe ... though you are remembering that in addition to the employee contributions, the employer contributes as well, right? 
(Just like a private pension :biggrin: )

http://www.cra-arc.gc.ca/nwsrm/rlss/2012/m11/nr121101-eng.html


Cheers


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## Eclectic12 (Oct 20, 2010)

gibor said:


> Yeah, unfortunately I think you are right....
> 
> Also using calculator i figured out that in order to get maximum $1,015 , person need to earn at least $51,100 (in current $) from age 18 until 65 , it means for 47 years! Not wonder that this is practically impossible to have. I came to Canada in mid 30's , so if even i earn from 35 to 65 $100,000 annually, I won't even close get maximum CPP


Since CPP is closed, earning more that $51,100 is of no benefit (from a CPP perspective).

As the CRA link I posted indicates:


> Contributors who earn more than $51,100 in 2013 are *not required or permitted* to make additional contributions to the CPP.



Cheers


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## Daniel A. (Mar 20, 2011)

CPP numbers are based on 45 years of working paying maximum contribution every year.

Since many changes have taken place over the years ie dropping the seven lowest years soon to be eight years the calculation is still based on maximum contribution every year.
If you worked for 15 years below the max. you will never make that up all you can do is drop the low years.


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## GoldStone (Mar 6, 2011)

gibor said:


> I came to Canada in mid 30's , so if even i earn from 35 to 65 $100,000 annually, I won't even close get maximum CPP


It doesn't matter if you earn 100K or 1M or 10M. Maximum pensionable earnings are capped.

Dogger posted a handy rule of thumb:

You get about $25/month for each year you contribute a maximum amount. Less if you take CPP before 65.


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## OnlyMyOpinion (Sep 1, 2013)

So the takeaway should be that CPP can only be considered one of your multiple sources of retirement income - and a modest one at that.
Since the maximum CPP taken from anyone's salary last year was only ~$2,307, it shouldn't be a surprise that the maximum pension from it is modest. It is still good value for money. 
The government is not going to look after your retirement for you. That is why other sources - building up your RRSP, TSFA, Canadian dividends from a taxable account, maybe even rental income - are all critical to ensuring you end up with a decent retirement income. 
Jonathan Chevreau had a nice, simple graphic showing your 'choices' in a Financial Post article a few years ago: 
http://opinion.financialpost.com/2010/12/24/four-retirement-scenarios-from-bare-bones-to-living-large/


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## Retired Peasant (Apr 22, 2013)

Another thing to remember for people retiring early, those 'low' years will add up with all those 0 years between retiring and 60/65.


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## Dogger1953 (Dec 14, 2012)

gibor said:


> I just checked mine CPP estimate payment on service canada website...
> It says that maximum anyone can get is $1,015 monthly.
> However, if I already have estimated $800 at age 65, so in several years I'll reach maximum of $1,015
> The question what goona be after:
> ...


gibor - Sorry, just seeing your question today or I would have replied sooner. Basically, the online CPP estimates are based on your current average pensionable earnings (from age 18 until current, allowing for the general dropout). If your future earnings are higher than your current average, the estimate will go up. If your future earnings are lower than your current average, your estimate will go down.
Here is a link to an article that I recently wrote on this subject: http://retirehappy.ca/understanding-cpp-statement-contributions-soc/


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## james4beach (Nov 15, 2012)

I just checked my CPP info at the service canada web site for the first time. Under "Estimated Monthly CPP Benefits" it says

The maximum retirement pension monthly amount at age 65 for this year is: $1,012.50
If you were 65 today, you could receive a monthly retirement pension of: $359.31

I'm kind of surprised it's that high... I'm around age 30 and have a long way to retire. So just from my contributions so far, I'm already 35% of the way to full monthly CPP? Am I reading that right?

Of course I realize this is all academic and I somewhat expect the CPP to be gone by the time I retire anyway  It's probably going to get drained dry from demographics.


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## Dogger1953 (Dec 14, 2012)

james4beach said:


> I just checked my CPP info at the service canada web site for the first time. Under "Estimated Monthly CPP Benefits" it says
> 
> The maximum retirement pension monthly amount at age 65 for this year is: $1,012.50
> If you were 65 today, you could receive a monthly retirement pension of: $359.31
> ...


james - Sorry, but you've totally missed the point. The estimate of $359.31 means that for the 13 years of your contributory period (from age until age 30), your average earnings has been about 35% of the YMPE (allowing for the 16% dropout in 2013) , or about $18,000 in 2013 dollars. If you continue to earn at that same level until age 65, your CPP will stay at the $359.31 level. If you start earning above that level, your CPP at age 65 will go up. If you never contribute again to CPP, those 13 years of 35% earnings will be averged over 39 years, and your age-65 CPP will decrease to about $121.50. Better keep working!!!


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## GoldStone (Mar 6, 2011)

james4beach said:


> Of course I realize this is all academic and I somewhat expect the CPP to be gone by the time I retire anyway  It's probably going to get drained dry from demographics.


This is an often repeated urban myth and it's not true.

Office of the Chief Actuary is required by law to review CPP sustainability every 3 years. You can find the reports here:
http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=498

The most recent report:
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/oca/reports/CPP/CPP25_e.pdf

Executive Summary, Part E. Conclusion:



> Under the 9.9% legislated contribution rate, the assets are projected to grow rapidly over the next 11 years as contribution revenue is expected to exceed expenditures over that period. Assets will continue to grow thereafter until the end of the projection period, but at a slower pace, with the ratio of assets to the following year’s expenditures expected to reach a level of 5.2 by 2050. Thus, despite the projected substantial increase in benefits paid as a result of an aging population, the Plan is expected to be able to meet its obligations throughout the projection period and to remain financially sustainable over the long term.


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## james4beach (Nov 15, 2012)

GoldStone said:


> This is an often repeated urban myth and it's not true.


I don't agree with the economic projections/assumptions made by the analysts (page 22). This is just my opinion based on my own beliefs about the future of the domestic economy.

I think their unemployment forecasts in the 6% to 7% range over overly optimistic.
I also think their real rate of return assumptions of 4.0% are way too optimistic.

So no, I don't agree with their projections and assessments about CPP sustainability. I do not believe the CPP will be sustainable in the long term if you put in more realistic assumptions.


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## james4beach (Nov 15, 2012)

Dogger1953 said:


> If you continue to earn at that same level until age 65, your CPP will stay at the $359.31 level. If you start earning above that level, your CPP at age 65 will go up. If you never contribute again to CPP, those 13 years of 35% earnings will be averged over 39 years, and your age-65 CPP will decrease to about $121.50. Better keep working!!!


Wow thanks for clearing this up, this is important to know.
Looks like all those years in school really hurt me. I'd better buckle down to work if I want to collect that super juicy CPP in 40 years! lol


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## GoldStone (Mar 6, 2011)

james4beach said:


> I don't agree with the economic projections/assumptions made by the analysts (page 22). This is just my opinion based on my own beliefs about the future of the domestic economy.
> 
> I think their unemployment forecasts in the 6% to 7% range over overly optimistic.
> I also think their real rate of return assumptions of 4.0% are way too optimistic.
> ...


They did sensitivity analysis of their assumptions in section IV (page 46).

Take a look at Table 20 (page 48). You can see the impact of the real rate of return on the minimum contribution rate. Real return of 2.8% (line 1) bumps the contribution rate from 9.85% to 10.49% after 2023. An increase of 0.64%. That's not the end of the world.

Next, take a look at Table 22 (page 52). It demonstrates the impact of higher unemployment rate on the contribution rate. Again, the impact is fairly minimal.

I fully expect that CPP will be there for me and you. Worst case scenario, they will have to increase the contribution rate from 9.9% to 10.5%.


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## james4beach (Nov 15, 2012)

Thanks Goldstone that's quite helpful... thanks for pointing to those specific parts. The effect of those assumptions isn't as major as I first thought


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