Canada Pension Plan (CPP) Explained: A Complete Guide for Newcomers

What Is the Canada Pension Plan?

The Canada Pension Plan (CPP) is one of the three pillars of Canada's retirement income system. The other two pillars are Old Age Security (OAS), which is a residence-based benefit, and private savings such as Registered Retirement Savings Plans (RRSPs) and workplace pension plans. Unlike OAS, which is funded through general tax revenue and based on how long you have lived in Canada, CPP is an earnings-based program funded by contributions from workers and employers.

For newcomers to Canada, understanding CPP is essential because it directly affects your paycheque and your future financial security. Every time you receive a paycheque from a Canadian employer, you will see a CPP deduction. These contributions build toward benefits that you or your family can receive in the future, including a monthly retirement pension, disability benefits if you become unable to work, and survivor benefits for your family if you pass away.

How CPP Contributions Work

Employee and Employer Contributions

CPP contributions are mandatory for all workers in Canada between the ages of 18 and 70 who earn more than the basic exemption amount, which is $3,500 per year. Both the employee and the employer contribute an equal amount. If you are self-employed, you pay both the employee and employer portions. The contribution rate for employees is set annually by the federal government and, as of recent years, is approximately 5.95% of your pensionable earnings between the basic exemption ($3,500) and the yearly maximum pensionable earnings (YMPE), which is adjusted annually for inflation.

Starting in 2024, a second additional CPP contribution (CPP2) was introduced for earnings between the first ceiling (YMPE) and a second, higher ceiling (YAMPE). This enhancement is designed to increase the retirement benefits available to future retirees. The contributions are automatic; your employer deducts them from your pay and remits them to the Canada Revenue Agency (CRA) on your behalf.

How Much Will You Contribute?

The exact amount you contribute depends on your earnings. If you earn less than the basic exemption of $3,500 per year, you do not contribute to CPP. If you earn more than the YMPE (approximately $68,500 in recent years, adjusted annually), your contributions are capped at the maximum annual amount. For most workers earning a moderate income, the CPP deduction is a noticeable but manageable portion of each paycheque. Your annual T4 slip from your employer will show exactly how much you contributed during the tax year.

CPP Retirement Pension

When Can You Start Receiving It?

The standard age to begin receiving the CPP retirement pension is 65. However, you can choose to start receiving a reduced pension as early as age 60, or you can delay your pension to as late as age 70 for a larger monthly amount. If you take your pension before 65, the amount is reduced by 0.6% for each month before your 65th birthday (a maximum reduction of 36% at age 60). If you delay past 65, the amount increases by 0.7% for each month after your 65th birthday (a maximum increase of 42% at age 70).

The decision of when to start your CPP pension is an important financial planning consideration. If you are in good health and have other sources of retirement income, delaying past 65 can result in a significantly larger monthly pension for the rest of your life. If you need the income sooner or have health concerns, starting earlier may make more sense. A financial advisor or the Service Canada CPP benefit estimator can help you make this decision.

How Your Pension Is Calculated

Your CPP retirement pension is based on your average earnings throughout your working life, adjusted for inflation. The general formula aims to replace approximately 25% of your average pensionable earnings (or up to 33.33% for enhanced CPP contributions made after 2019). The maximum monthly CPP retirement pension at age 65 changes each year; as of recent years, it has been approximately $1,300 to $1,400 per month, but most people receive less than the maximum because they did not contribute the maximum amount every year.

Several provisions can increase your pension amount or reduce the impact of low-earning years. The general dropout provision automatically excludes up to eight years of your lowest earnings from the calculation. The child-rearing provision (discussed below) can exclude years when you were caring for young children. And the disability dropout provision excludes periods when you were receiving CPP disability benefits.

CPP Disability Benefit

Eligibility and Application

The CPP disability benefit provides a monthly payment to people who have made sufficient CPP contributions and who have a severe and prolonged disability that prevents them from working at any job on a regular basis. To be eligible, you must be under age 65, have a severe and prolonged mental or physical disability as certified by a medical practitioner, and have contributed to CPP in at least four of the last six years (or three of the last six years if you have contributed for at least 25 years).

Applying for CPP disability involves completing a detailed application form and having your medical practitioner complete a medical report. The process can take several months, and many initial applications are denied, so it is important to provide thorough medical documentation. If your application is denied, you have the right to request a reconsideration and, if necessary, appeal to the Social Security Tribunal of Canada.

CPP Survivor and Death Benefits

Survivor's Pension

If a CPP contributor passes away, their surviving spouse or common-law partner may be eligible for a monthly survivor's pension. The amount depends on the deceased contributor's CPP contributions, the survivor's age, and whether the survivor is already receiving other CPP benefits. A surviving spouse under age 65 can receive a flat-rate portion plus a percentage of the deceased's retirement pension. A surviving spouse aged 65 or older receives a percentage of the deceased's pension, combined with their own retirement pension up to a maximum.

Children's Benefit and Death Benefit

Dependent children of a deceased CPP contributor may receive a monthly children's benefit until they reach age 18 (or 25 if they are in full-time attendance at school). There is also a one-time lump-sum CPP death benefit of up to $2,500, which is paid to the estate of the deceased contributor or to the person who paid the funeral expenses. These benefits are applied for through Service Canada.

The Child-Rearing Provision

The child-rearing provision is an important feature of CPP that benefits parents, particularly mothers, who take time away from the workforce to care for young children. Under this provision, years during which your earnings were low or zero because you were the primary caregiver for a child under age seven can be excluded from the calculation of your CPP retirement, disability, or survivor benefits. This prevents those low-earning years from dragging down your average earnings and reducing your future benefits.

To qualify for the child-rearing provision, you must have received the Canada Child Benefit (or the former Family Allowance) for a child under seven during the years in question. This provision is particularly valuable for newcomer parents who may have had periods of low earnings while settling in Canada and caring for young children.

International Social Security Agreements

How Agreements Help Newcomers

Canada has international social security agreements with more than 60 countries. These agreements are designed to help people who have lived and worked in more than one country qualify for pension and other social security benefits. If you contributed to a pension system in your home country and that country has an agreement with Canada, the periods of contribution in both countries may be combined to help you meet the eligibility requirements for CPP benefits.

For example, if you need a minimum number of years of CPP contributions to qualify for a retirement pension but you have not yet accumulated enough years in Canada, your years of contributions in a country with which Canada has an agreement may count toward meeting that minimum. The actual benefit you receive from CPP will still be based only on your Canadian contributions, but the international agreement helps you meet the threshold for eligibility.

CPP and Other Retirement Benefits

CPP is just one component of your retirement income. As a newcomer building your financial future in Canada, you should also be aware of other financial supports available to newcomers, including Old Age Security (OAS), the Guaranteed Income Supplement (GIS) for low-income seniors, the tax system and credits, and private savings vehicles like RRSPs and Tax-Free Savings Accounts (TFSAs). Understanding how these programs work together will help you plan effectively for retirement.

If you are working in British Columbia and have questions about your employment rights, including your right to receive CPP contributions from your employer, our employment rights guide provides comprehensive information. For information about healthcare benefits and housing support, explore our other newcomer guides.

How to Check Your CPP Statement

You can view your CPP contributions and estimate your future benefits by logging into your My Service Canada Account. This online portal allows you to see a record of all your CPP contributions, estimate your retirement pension at different ages, and apply for CPP benefits when you are ready. Setting up your My Service Canada Account is one of the first things newcomers should do once they have a Social Insurance Number.

WelcomeAide is here to help you navigate Canada's benefits system. Use our AI Newcomer Navigator to ask questions about CPP, retirement planning, or any other settlement topic. Explore our blog for more newcomer guides, learn about our mission, or see how to get involved in supporting newcomer communities across Canada.