Q. If I were to retire today, my Statement of Estimated CPP Income notes that I would receive is $900 a month. Does this mean that, even if I stop contributing to the Canada Pension Plan (CPP) now and never put in a penny more, I am still going to receive $900 adjusted for inflation when I hit 65? I am 50 now. Basically, I am not sure what the statement “if you were to retire now” means.
A. Hi, Eva. Your question is about how to understand the estimated retirement benefit shown in your Canada Pension Plan Statement of Contributions: Is the monthly retirement benefit that’s shown on your statement what you’ll get at age 65, even if you’re not 65 now—and, if not, how do you estimate what your retirement benefit might be at your planned retirement age?
First things first: The CPP Statement of Contributions, which you can get from Service Canada (details below), shows all of your contributions to the Canada Pension Plan over your working lifetime, from age 18 (or January 1966, whichever is later) to a maximum of age 65, and the earnings on which those contributions are based.
It also provides an estimate of what your CPP retirement pension benefit would be if you were age 65 now, and how that amount would change if you were to take the retirement benefit as early as possible (at age 60) or to defer it as late as possible (to age 70).
But what if you aren’t 65 now? Does the amount of your estimated monthly benefit change, either as a result of your employment between now and age 65 or inflation—and, if so, how?
To answer these questions, we first need to understand how the amounts in your Statement of Contributions are calculated. The statement provides an estimate of your CPP retirement benefit that’s based on two assumptions:
- first, that you’ll keep working to at least age 60;
- and, secondly, that you’ll continue to have about the same working income, relative to something called the Year’s Maximum Pensionable Earnings, from now until you retire (at age 60 or later).
Let’s look in more detail at what that second assumption means in practice.
In order to calculate your retirement benefit, whether on your Statement of Contributions or when you retire, all of your past earnings—which might have started a few decades ago—are updated to current values using what is known as the Year’s Maximum Pensionable Earnings, or YMPE.
The YPME is the maximum amount of earnings covered by the CPP in any given year (for 2019, it’s $57,400; in 1966, when CPP first began, it was $5,000). It’s based on average wages in Canada and changes in tandem with how average wages change over time.
When the Canada Pension Plan was first implemented, it was designed to replace up to 25% of the average industrial wage in retirement. More recently, the CPP was amended so that by 2065 it will replace up to 33.3% of the average industrial wage. (The concept of the “average industrial wage” is used by governments and employers around the world as a reasonable proxy for the wage rate of the average worker.)
To calculate your retirement benefit, each year of past earnings is calculated as a fraction of the YMPE in effect for that year. So, for example, if the YMPE for a given year is $50,000, and you had pensionable earnings of $40,000 in that year, you would earn 80% of the maximum CPP benefit for that year (as $40,000 is 80% of $50,000).
Someone aged 50 in 2019 might have started working and paying CPP premiums in 1987 when the YMPE was $25,900. If they earned $20,720 in 1987, they will have earned 80% of the maximum CPP benefit for that year.
To calculate your retirement benefit, the ratio of the CPP benefit you’ve earned relative to the maximum benefit each year is determined this same way. After your initial CPP retirement benefit is assessed, it may be adjusted in accordance with various additional provisions of the overall CPP formula, including years of low income, disability and years during which you were the primary caregiver to a child under age seven. These years of low or no income will be dropped from the calculation of your benefit.
Next, your total earnings for each “regular” year, adjusted in accordance with how they measure up to the YMPE for that year and then calculated as an average monthly amount, are added up and multiplied by 25% to get your retirement benefit.
Starting in January 2019, the amount you (and your employer) pay into CPP will gradually rise so that more of the YMPE is covered by CPP—up to 33% when the recent CPP amendments are fully implemented—and the amount covered by CPP contributions will also rise, beyond the YMPE, requiring additional CPP contributions as well.
Now, back to your personal CPP Statement of Contributions, Eva, and how it relates to your eventual CPP retirement benefit.
Earlier, we said that the Statement of Contributions can be considered accurate if you keep working until age 65 and keep earning about the same ratio of employment income to the Year’s Maximum Pensionable Earnings. Conversely, the estimate can be “inaccurate”—in the sense of not providing an estimate that’s close to what your CPP retirement benefit will actually be—if your earnings change significantly in the years leading to retirement, whether up or down; or if you stop working earlier than age 65.
As a general rule, then, the closer you are to age 65, the more accurate the estimated retirement benefit on your Statement of Contributions is likely to be; and the farther you are from retirement, the greater the chance that your estimated retirement benefit could differ from what you ultimately receive.
In your own case, Eva, you have 15 years until you turn 65. The $900 per month estimated benefit on your Statement of Contributions is just under 80% of the current maximum monthly benefit of $1,154.58 per month. While the YMPE is adjusted as wages change, the monthly CPP benefit is adjusted once a year in line with increases in the Consumer Price Index.
So, if you keep earning about 80% of the YMPE until age 65, your current Statement of Contributions is likely to be pretty close to what you’ll get in retirement—but it will be adjusted upwards as the YMPE rises over time, to keep your monthly payment at about 80% of the maximum monthly benefit when you retire.
Anyone can learn more about their own estimated retirement benefit by requesting a copy of their own Statement of Contributions in one of three ways:
- by phone: call Service Canada at 1-800-277-9914 to request your own statement;
- by mail: call 1-877-454-4051 to request that the application form be mailed to you, which you would then return by mail;
- online, if you have a Service Canada account (request an access code to set up your own Service Canada account).
As I’ve said before, for many Canadians, the CPP retirement benefit will be an important part of their income after they’ve stopped working. Even if you’re not near retirement yet, it’s worthwhile to delve into how your monthly CPP payment is determined—and reviewing your Statement of Contributions can get you started.
Alexandra Macqueen is a Certified Financial Planner and retirement expert providing advice through Pension Acuity Partners.
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