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
The cost of contributing to the CPP is 4.95% of your earnings above the Year’s Basic Exemption ($3,500 for 2015) and up to the Year’s Maximum Pensionable Earnings ($53,600 for 2015). 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 2015 would be $319.56 (based on maximum earnings of $52,500 for 2014 x 0.625%) or about $26.63 monthly.
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 (earned for working ages 65 to 69)
|“Cost” of contributing|
|“Benefit” of PRB|
- “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
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 2013, 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 2014 earnings. As a result, she will be eligible for a PRB starting in January 2015, at an annual rate equal to 0.625% of her 2014 earnings. This PRB is payable for life, and it would take her 7.3 years until age 73.3 for her total PRB received to equal the cost of her voluntary 2014 contributions to the CPP. If she decided to contribute the following year also, she would qualify for a second PRB which would be 0.7330% of her earnings. For that contribution she would break even in 6.8 years at age 73.8.
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.