Contributing to CPP after age 65

It used to be that this decision was made for you. Once you started receiving your CPP retirement pension, you could not make further contributions to the CPP. If you weren’t receiving your CPP retirement pension, you had to continue making contributions until age 70.

Since the new changes to CPP were implemented January 2012, you have been able to choose whether to contribute to the CPP after reaching age 65 (up to age 70), but only if you’re receiving your CPP retirement pension. The default, however, is that contributions are mandatory until age 70, unless you “elect not to contribute.” You can find more information about how to make this election on the Canada Revenue Agency website.

If you are over age 65 and receiving your CPP retirement pension, the decision as to whether to contribute to the CPP should be made based on a cost/benefit analysis. The main factors affecting the cost are the amount of your earnings, and whether you’re an employee or self-employed. The main factors affecting the benefit are the amount of your earnings and your age.

Related article:  CPP for the over 65 and still working 

BooksCost/Benefit analysis if receiving CPP retirement pension

The cost of contributing to the CPP is 4.95% of your earnings above the Year’s Basic Exemption ($3,500 for 2013) and up to the Year’s Maximum Pensionable Earnings ($51,100 for 2013). For self-employed people, this cost doubles because they must pay both the employee and the employer share of the contribution. The actual cost of contributing to the CPP is proportionately lower for lower wage earners due to the Year’s Basic Exemption (YBE), but for the purpose of this cost/benefit analysis, let’s just say that the cost is a fixed 4.95% of earnings.

The benefit of contributing beyond age 65 while receiving a CPP retirement pension is that you will become eligible for a new monthly benefit known as a post-retirement benefit or PRB. Each year that you contribute to the CPP after starting your CPP retirement pension will generate an additional PRB, paid monthly for life.

The annual amount of a PRB is equal to 0.625% of the earnings on which you made the contributions, adjusted by the actuarial factor based on your age as of January of the year following the contributions. This means that the annual maximum PRB for a 65-year-old in 2013 would be $319.38 (based on maximum earnings of $51,100 for 2012 x 0.625%) or about $26.62 monthly. You can find more information about the PRB  on the Service Canada’s website.

The cost, benefit and “breakeven period” for deciding whether to elect contributing to CPP are shown in the following table:

Approximate Breakeven Period for PRBs (ages 65 to 70)

Age

65

66

67

68

69

70

“Cost” of contributing

4.95%

4.95%

4.95%

4.95%

4.95%

4.95%

“Benefit” of PRB

0.625%

0.6775%

0.7300%

0.7825%

0.8350%

0.8875%

Breakeven (years)

7.9

7.3

6.8

6.3

5.9

5.6

Breakeven (age)

72.9

73.3

73.8

74.3

74.9

75.6

Definitions

  • “Cost” of contributing to CPP: 4.95% of earnings, ignoring the YBE
  • “Benefit” of PRB: Annual amount of PRB, expressed as a percentage of earnings
  • Breakeven (years): Cost of contributions divided by Benefit of PRB
  • Breakeven (age): Age at which PRB starts, plus number of breakeven years

Case study

Let’s use an example to make sure that the above table makes sense to you.

If Joyce decides to apply for her CPP retirement pension at age 65 in 2012, but she still wants to contribute to CPP in order to receive a PRB, the cost of doing so will be 4.95% of her 2012 earnings. As a result, she will be eligible for a PRB starting in January 2013, at an annual rate equal to 0.625% of her 2012 earnings. This PRB is payable for life, and it would take her 7.9 years until age 72.9 for her total PRB received to equal the cost of her voluntary 2012 contributions to the CPP. If she decided to contribute the following year also, she would qualify for a second PRB which would be 0.6775% of her earnings. For that contribution she would break even in 7.3 years at age 73.3.

Note: As mentioned previously, the “cost” of contributing and therefore the breakeven period would double for a self-employed person.

Cost/Benefit analysis if NOT receiving CPP retirement pension

The only time that there is an easy answer to this question is if you already have 39 or more years of maximum contributions to the CPP. In this case, any additional contributions do not increase your CPP retirement pension at all, so additional contributions are effectively wasted. In this case, you may want to consider whether you would be better off applying for your CPP immediately. This would allow you to either opt out of making additional contributions and save that money, or any further contributions that you made would at least result in PRBs as detailed above, rather than being “wasted”.

Related article:  Child Rearing Drop Out – Getting more out of CPP

In all other situations, I strongly encourage you to get an accurate estimate of your future CPP retirement pension with and without the additional earnings/contributions that you will make if you continue working and don’t apply for your CPP retirement pension. For estimating purposes, you can try calling Service Canada at 1-800-277-9914 or use their online CPP calculator.

Alternately, you can contact me directly at DRpensions@shaw.ca. You will need to provide me with your latest CPP statement of contributions, which is available on the Service Canada website. I charge a small fee for each calculation that I do, but I guarantee the accuracy of my calculations.

You can also watch this webspace in coming weeks, where I’ll try to provide all of the information that you’ll need in order to calculate your own CPP benefits!

Written by Doug Runchey

Doug Runchey worked for the Income Security Programs branch of Human Resources and Skills Development Canada for more than 32 years, and was a specialist in the Canada Pension Plan and Old Age Security legislation, regulations and policy areas. He now runs his own company, DR Pensions Consulting, which provides pension advice, including detailed calculations for CPP retirement planning and “credit splitting” purposes. Doug can be reached by email @ DRpensions@shaw.ca or check out his website at http://www.drpensions.ca/.

32 Responses to Contributing to CPP after age 65

  1. Wow thanks for the thorough explanation. I knew you could continue to contribute to the CPP after starting the retirement pension, but didn’t know about the calculations. I wonder how the breakeven points will change after considering tax…

    • Brian
      Thanks for the positive feedback!
      As for considering tax implications, I don’t see that it would change the breakeven points much. The CPP contributions would be tax exempt (which would reduce the “cost”) and the PRBs would be taxable (which would also reduce the “benefits”).
      The breakeven points should therefore be identical, unless your actual tax bracket changes. In that case, most people would likely be in a lower tax bracket when receiving their PRBs, which would make the breakeven point even sooner. On the other hand, I can only hope that I am in a higher tax bracket when I’m receiving my PRBs. In that case, I would gladly put up with a slightly later breakeven point!

  2. It is good people like you are writing this type of article. It is a start but leaves a lot out – for example the tax implications of contributing or not and the potential investment gains by not sending more money to the government but investing it between 65 and 70. Also, I imagine the normal case is for the self-employed scenario (not a lot of people are working like a normal full-time employee after 65 – they tend to be under contracts), which you did not use in your chart. The break-even periods are really double for most people.

    Sorry for the bad news, but things are more complicated than you thought.

    • Robert
      Thanks for your comments, but I’ll have to disagree with your assessment. I’ve talked about the tax implications in my reply to Brian above, so I won’t repeat those thoughts here.
      I won’t pretend to be an investment expert, but I calculate that if you took the annual maximum contributions to CPP ($2,356.20 for 2013) for the 5-year period of age 65-70, and invested them at a 10% annual rate of return, you would have accumulated a total amount of $15,823.45 at age 70. Not a bad savings, but if you continued to receive a return of 10% on that investment for life, your annual income would be a fixed amount of $1,582.35.
      If on the other hand, you invested those same amounts into your CPP contributions, I calculate that your cumulative annual PRB at age 70 would be about $1,999.29, indexed to the CPP for life. And that’s not counting the approximately $3,730.23 that you would have received in PRBs between the ages of 66-70.
      So, unless you know of an investment oportunity that will guarantee a higher rate of return than 10% for life, I think the decision is as simple as I’ve described (for employed persons over age 65 who are in recipt of their CPP retirement pension).
      And yes, I recognize that the breakeven points that I have calculated are double for the self-employed, and I mentioned that twice in my article.

      • TYPO! My comment above should have read:
        “I calculate that your cumulative annual PRB at age 70 would be about $1,999.29, indexed to the CPI (not CPP) for life.”

      • We can disagree. My only major point is I believe things are much more complicated, and vary considerably from person to person.

        One question. I am curious about your source for the sliding scale of PRB benefits. The CRA site https://srv111.services.gc.ca/PRB_FAQ.aspx#Q6 hast it maxed at a flat 1/40 of the CPP max. I think you leave inflation out of your calculations, and I don’t blame you. But then the increasing % Benefit from PRB becomes more of a mystery.

        • Robert
          My source for the sliding scale of PRB benefits is the legislation. Here’s a quick copy & past:
          59.1 (1) Subject to subsections (2) and (3),
          a post-retirement benefit payable to a contributor
          is a basic monthly amount determined by
          the formula
          [(A × F/B) × C × D × E] / 12
          where
          A is the amount determined under subsection
          53(1) for the year prior to the year in which
          the post-retirement benefit commences to
          be payable;
          B is the Year’s Maximum Pensionable Earnings
          for the year prior to the year in which
          the post-retirement benefit commences to
          be payable;
          C is 0.00625;
          D is the Maximum Pensionable Earnings Average
          for the year in which the post-retirement
          benefit commences to be payable;
          E is the adjustment factor referred to in subsection
          46(3) or (3.1), as the case may be,
          based on the age of the contributor on January
          1 of the year in which the post-retirement
          benefit commences to be payable; and
          F is the amount determined by the formula
          G / H
          where
          G is the amount of the earnings referred to
          in subparagraph 53(1)(b)(i), and
          H is the aggregate of the earnings referred
          to in subparagraph 53(1)(b)(i) and those
          referred to in subparagraph 53(1)(b)(ii).

          What’s missing from the CRA “max” is the actuarial factor specified as point #E. It’s similar to the advertised “maximum retirement pension”, which really applies just to an age-65 pension, not to an age-70 pension.

  3. I refer your answer to Robert-
    And that’s not counting the approximately $3,730.23 that you would have received in PRBs between the ages of 66-70.

    PRB for age
    65 is 319.38
    66 is 319.38+346.20=665.58
    67 is 665.58+373.03=1038.61
    68 is 1038.61+399.86=1438.47
    69 is 1438.47+425.85=1864.32
    70 is 1864.32 + 453.51=2317.83

    Terefore total for 66 – 70 is
    319.38+665.58+1038.61+1438.47+1864.32+2317.83=7690.72
    and not 3,730.23 as you mentioned. Is this correct?

    • Siva
      Slightly different results from my numbers, but two errors with your conclusion, and the first error might have been caused by my chart in the original article.
      Firstly, if you start receiving your regular retirement pension at age 65 (and I assumed in January)and continue to contribute until you’re age 70, your first PRB would be payable at age 66 in the annual amount of approx $346.20. That puts your total out by 5 x $319.38 = $1,596.90.
      Secondly, I stopped my calculation when he turned age 70, having recieved only 4 years of PRBs totalling about $3,730.23 by that time and receiving a cumulative annual PRB of approx $1,999.29 for age 70 and beyond.
      Does this make sense now?

      • I think this discussion has helped make my main point, that things are more complicated than they may appear.

        Doug you seem to take the time to get the numbers correct, which is a great service. I wish I had you working on my major retirement financing issues where things are harder to reduce to a table.

        It is possible for some that the PRB break-even math makes a bit of sense with certain assumptions. One is that you do not contribute both sides of the cost which probably most do over 65. Another is that your need for money will be greater after the break-even point than before it (I would think that is a very unusual situation – people normally slow down purchases precipitously before age 80).

        • Robert – OK, slightly more complicated that at first suggested, and I’ll concede on the self-employed issue. I might even concede on the lower spending issue! But I’ll defend the value of the PRB for those people who are employed past age 65 and who don’t have much savings or any pension aside from OAS & CPP (and there are lots of such people).
          And although I didn’t mention it in my article (I thought it was complex enough already), the PRB is an even better investment for lower wage earners (many of the employed seniors) than for people earning near max, as the Year’s Basic Exemption (on which no contributions are made) makes up a larger portion of their earnings, and thereby reduces their true percentage cost below 4.95%.

  4. One of the RHB readers has emailed me to point out that I have made a fairly important mistake in the above article.

    I have indicated that if you are between the ages of 65 and 70 that you have the choice to opt out of future CPP contributions, regardless whether you are receiving your CPP retirement pension or not. That is NOT TRUE.

    The only time that you have a choice is if you are between the age of 65 and 70 AND you are in receipt of your CPP retirement pension.

    I will revise this article as soon as I figure out how to do so!

  5. It is nice that you are so diligent with your blog. I would be so lucky to find this sort of detailed discussion on matters that are more directly relevant to my more pressing retirement issues. I am only 60 so the after 65 discussions are important but not weighing on me so much yet.

  6. Because you asked, Doug:

    Retirement is complex and to even phrase questions is complicated, so I can only give a taste here. I turned 60 in March. I have not started collecting CPP although I am aware it may be the best option financially. But I am still working so I figure even if I get nipped a bit I can afford waiting a bit with employment income flowing. I could retire any day and almost certainly will by next February.

    Thanks to the new rules I have to decide when to retire in 3 senses (articles seem to assume the MEANING OF RETIREMENT , but it has many depending on the person – often article mean quitting and getting a company pension which has no meaning in my world): 1. Actually quit my day job – the financials of this are more obvious than many things but amount saved through not working is tricky to calculate, and their are a bunch of personal issues around planning that new abundance of time in a satisfying manner. 2. Start collecting CPP – the optimum for this date is highly interactive with other issues, but as mentioned above I figure I can suffer the hit of not collecting for now. 3. Stop paying premiums – this means living off resources not subject to premiums – and calculating whether the 9.9% whopping tax savings is really a deal or not.

    (At least for a few years I can chose to be paid to the YMPE from company assets – maybe to age 70. Several years before it squeezes my income flow from investments there)

    I am single – most articles assume a partnership in living, although they do often throw in an undersized morsel for the single. (btw I do not think singlehood is special any more – very common) I went through an unimaginably messy divorce and raised my kids from preschool to college without help. I guess one day live with a woman again but single finances has to be my assumption as I am a hard sell on the idea.

    I am self-employed. So it is my choice (and to some extent my accountant) whether to pay myself as much as possible in dividends rather than salary – this is another complicated area as it heavily affects my company’s wealth also. Putting aside that issue, I can certainly fire myself at will and start collecting income from company assets when I hit 65, thereby avoiding the hefty CPP tax. I would then be living off cash assets, RRSP savings, and maybe TFSA savings, while I meantime am either collecting CPP payments OR NOT, or while paying my PRB premiums. (A zillion variables but these are highlights)

    Staying in a 4 bedroom detached home alone is another one with sky-high real estate prices near the Toronto subway where I live. A wonderful area and it in many ways is a great area to get older in but obviously downsizing or renting after a sale would free up tremendous capital, which then would need managing in unsheltered instruments. One complicating factor is a house is a place to live as well as an asset class. I need to know where I want to be for the next 10+ years.

    Should I drain corporate assets quickly, at the YMPE, or last since the corporate coffers can legitimately be used for business expenses if I choose activities that are potentially of business value such as education and conference travel. Or hiring one of my kids to manage things, etc. Point is, company assets are taxed higher than RRSP money but bring a lot more flexibility for personal taxes.

    So Doug, I do not think any of these things are rare situations – they do heavily interact with each other and there lies the real devil. Most of these issues receive very little coverage and so there are few to share ideas with. I do appreciate a lot those such as yourself that take a few common issues and work to elucidate them.

    I set up spreadsheets to calculate effects of variables such as amount received from CPP depending on age and Service Canada’s statement, age to start getting RRSP dividends paid rather than reinvested, age to take CPP, age to stop working, personal tax ramifications based on income source, and age to stop paying premiums. Spreadsheets and my skill with them both collaborate against the accuracy of my results, but it all helps a bit.

    Sorry I droned on too long and yet I have not nearly explained all the factors I wrestle with.

    By the way, what is the meaning of “retire” and “retirement” in your blog? I suspect it is more related to government income security programs more than other things.

    Robert

    • Robert

      You certainly do have lots of choices to make! Sorry that I really can’t offer much advice to you, except around the CPP and OAS benefits. I could certainly calculate or validate your CPP numbers if you wanted to email me at DRpensions@shaw.ca.

      As to the meaning of “retire” or “retirement”, I agree totally that those words have multiple interpretations, which is why I normally try not to use them in isolation. For me however, they would normally mean stopping your regular fulltime job and entering the next stage of your life, which could look very different from individual to individual.

  7. I sort of retired in mid 2009 at 60. I took a discounted CPP. I returned to the workforce in 2011. In 2012, I was required to resume contributions to CPP. My earning were well in excess of the max, yet my 2013 benefit was only adjusted by +$9.00/month. Not much of a return on the +4000.00 annually going from myself and my employer.
    I am assuming that the PRB doesn’t kick in until age 65 and my contributions for 2012 and 2013 are just something I have to do by law??

    Don

    • That’s interesting Don – I thought once you were getting CPP benefits all new contributions went toward PRB, which should show a better return than that.

    • Don
      Robert is correct. There has been some kind of error here. I’d suggest that you contact Service Canada at 1-800-277-9914 and ask for an explanation.
      If you’re not satisfied with that explanation, email me at DRpensions@shaw.ca. For a small fee, I can do some calculations to make sure that you’re receiving everything that you should be from CPP.

    • Don
      I realized in re-reading my reply, that I didn’t fully reply to your question about the timing of your PRB.
      The PRB based on your 2012 contribution should have been effective Jan 2013, and the first payment should have been around April or May 2013, with retroactivity to January.
      Your 2013 contributions will generate a new PRB effective Jan 2014, that should be paid with similar timing after your 2013 taxes are processed by Revenue Canada and your earnings info is relayed to Service Canada.
      You are required by law to contribute until you are age 65, at which time further contributions will become optional.

      • Robert & Doug,

        I did call Service Canada right after posting my comments. All of the literature I have read deals with working after 65 and continuing to contribute.
        There is little regarding being under 65 and the impact of mandatory contributions to age 65. The PRB resulting from my mandatory contributions in 2012 and 2013 is subject to some complex discounting scheme.
        The person I spoke to at Service Canada was extremely helpful but had to request that the calculation details be mailed to me. That could take a few weeks.
        When I returned to work in 2011, I requested my CPP benefit be stopped. Nope. That could not be done. With the rule change in 2012, I made the same request, Nope can’t be done. I went over the PRB with my accountant an he was unaware of any discounts or penalties.
        I did get the notice advising of my PRB payable in 2013 along with the retroactive adjustment. No reference to any discounts.
        As soon as I get the details I will post them. It may provide some info for a separate topic.
        I think I am glad I am not 62 or I would be paying back the PRB!

        Don

        • Don
          I’ll be very interested to see any reply that calculates a PRB for you in the range of $9.00/mth.
          Depending on your exact birth date (I used June 1949), I calculate that a 2013 PRB for max 2012 earnings should be approx. $22.85/mth. Service Canada’s own website at: https://srv111.services.gc.ca/PRB_01.aspx comes up with an annual PRB of $273 (ie, $22.75/mth).

          • I requested an explanation about a month ago. It is in progress and could take up to 9 weeks. Don’t want to hurry things do we?

            Don

    • Still. Waiting. My call last week to Service Canada resulted in being told that the CRA reported my 2012 income at about 1/10th of what it really was, so CPP were waiting for verification of the amounts. I asked if I could provide my documents, which I could, so I took everything into the Service Canada office and let them take copies and do the certification.

  8. Well I am still waiting for an explanation. After several phone calls, at least once a month, and weekly since mid february, I finally encountered an agent who knew enough about the process. Up to 2012, there was no requirement for employers to complete the CPP earning box on the T4 if you hit the maximum contribution. This changes for 2013, possibly because of cases like mine. My employer has provided an amended T4 for me, and I will be sending it along to CPP Client services.
    Now, just yesterday I got Jim’s email regarding Understanding the PRB. In this article you talk about a discount for those under 65! This was never brought up in this conversation, and while I have not looked hard, I have not found anything on the CPP site discussing it, nor have any of the bureaucrats I have spoken to discussed a discount. Yet you now even have a percentage.
    Maybe this discussion should be a part of the thread, because no one understands the PRB, at least from a “pre 65″ point of view.
    I think I know more than I did on Friday, but not really sure.

    Don

    • I finally got a response from the CPP Client Services acknowledging that the CRA made an error in reporting my 2012 pensionable earnings. The letter advised that I should be getting an adjustment in the near future.
      There was no discussion in the letter about any penalty being assessed because I was under 65 when receiving CPP.
      My 2014 benefit, based on my 2013 earnings (max) is $25.38 or 304.56/year so it appears I am penalized about $50.00/year.
      But at least I will get an adjustment and this full amount will now be indexed annually.
      So I hope everyone eligible for the PRB based on 2012 earnings conducts their own review.

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