The Pros and Cons of CPP: A Comprehensive Analysis

The CPP Dilemma

The Canada Pension Plan has been in the news lately as Alberta has indicated a desire to separate from the plan and make it a provincial pension plan. While this may seem like a radical new concept, it’s actually not new at all and has even happened historically.

In 1961, the Canada Pension Plan (CPP) came into law by the Federal Government and through some delicate negotiations an exception was made to the province of Quebec. Since Quebec wanted to retain autonomy, it was agreed that province could have a separate pension plan running alongside the Federal plan; thus the Quebec Pension Plan (QPP) was created. The two plans have been in existence ever since.

Regardless of whether Alberta can make the split from this Federal pension plan or not, the main issue will always be ensuring these plans are appropriately funded to provide for the citizens who’ve paid into them for a working lifetime.

The Reality of CPP

The reality is these plans whether Federal or Provincial, are not now, nor have they ever been, optional. That’s right, we have no choice but to pay into them during our working lives. The government has decided, like it or not, that we will save for retirement by taking a portion of our income every year with the promise of being able to collect that money as a pension when we retire.

Since the government runs these plans, naturally they get to make the rules. The amount you pay each year is set and increases each year by an inflationary amount. The more years you pay, and at the maximum amount, the more you will receive at age 65. For 2022 the maximum monthly CPP amount is $1,253.59, which is based on 39 years paying the maximum amount into the plan.

There is some flexibility on the age you can start drawing CPP, and this decision can lead to either a penalty or bonus. You can start as early as age 60, but will be penalized 0.6% for each month you collect before age 65 (7.2% per year). You can delay receiving CPP until age 70 and collect an additional 0.7% for each month after you turn 65 (8.4% per year). The government provides the incentive by rewarding delayed gratification (42% more at age 70) and penalizing early gratification (36% less at age 60).

How do you decide when to take your CPP?

The age you start your CPP is a hotly debated topic, and usually boils down to a personal decision. As a general rule, starting CPP early at age 60 is not recommended, unless you know for certain you are facing a shortened life span or you won’t need the extra income when you turn 65. Otherwise, the penalty is simply too much. The worst case scenario would be to collect CPP early and have the penalty cause you to outlive your money.

Waiting until 70 to collect CPP will mean relying more on other sources of income as you begin retirement. If that doesn’t drastically impact your standard of living it could make sense, but realistically, will you still have the energy and health to spend that extra CPP money in your seventies? As I said, it’s a personal decision which is highly dependent on how much you’re relying on CPP to maintain your retirement lifestyle.

Can I Retire on CPP

When it comes to government pension plans there’s a fact that we all must face; relying solely on government pensions to fund a retirement is a losing scenario. The CPP (or QPP) along with Old Age Security (OAS) simply won’t provide you with enough income in retirement. I highly suspect changing the plan administration from Federal to Provincial Government will not improve your retirement reality.

Don’t Depend on CPP

You must do more which means reducing taxes by contributing to a Registered Retirement Savings Plan and Tax Free Savings Account, participating in a company pension plan if you have one, investing your savings sensibly, and building up equity by paying off your mortgage.

In my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.

As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences.