How much is one year of maximum CPP contributions worth?
I’ve had a number of clients recently who wanted to know how their future CPP contributions would affect their retirement pension. After seeing a range of impacts for this group of clients, it struck me that the issue would be a good subject for this month’s article.
You may have heard me say previously that each year of maximum CPP contributions is worth about $25.00 towards an age-65 retirement pension. That used to be quite valid, but now the actual amount is over $30.00, even without considering the “enhanced CPP” component.
A more accurate answer can be calculated by dividing the maximum CPP retirement pension amount ($1,175.83 for 2020) by 39 years. If we do this, we find out that one year of maximum contributions is worth $30.15.
Where does the 39 years come from? The maximum CPP contributory period is from age 18 to 65, which is 47 years. The general dropout is 17%. What’s left is 83% of 47 years, which is 39 years.
But even this answer is true only in the following situation:
- The contributor starts receiving the retirement pension at exactly age 65, and
- The contributor doesn’t already have 39 years of CPP contributions, and
- The contributor has never been in receipt of a CPP disability pension, and
- The contributor isn’t eligible to drop out any years under the child-rearing provision (CRP), and
- The contributor doesn’t have any earnings in 2019 or later (enhanced CPP).
How does this value change if the contributor starts taking the retirement pension earlier or later than age 65?
If the contributor starts receiving a retirement pension earlier than age 65, each year of earnings will be averaged over a shorter time period (making each year of maximum contributions more valuable), but the retirement pension is reduced by an age-adjustment factor (making each year of maximum contributions less valuable).
For example, someone starting their CPP at age 60 will have their earnings averaged for their best 34.86 years (83% of 42 years), making each year of maximum contributions worth $33.73 ($1,175.83/34.86 years) towards their “calculated retirement pension.” However, when this calculated amount is reduced by the age-adjustment factor for starting it early (0.6% for every month for 2020), we find that each year of maximum contributions is worth only $21.59 towards an age-60 retirement pension.
Related article: How to apply for CPP early?
For someone starting their CPP after age 65, their earnings are averaged for their best 39 years, the same as for an age-65 pension, but the age-adjustment factor makes the one year of maximum earnings worth more. For example, at age 70, one year of maximum earnings could be worth $42.81 ($30.15, as in the calculation at age 65, x 142% for the age-adjustment factor at 70).
How does this value change if the contributor already has 39 years of CPP contributions?
As mentioned previously, an age-65 CPP retirement pension is averaged over your best 39 years of contributions. If you already have 39 years of contributions, the next year of maximum earnings will replace one of those years. If all 39 years of prior contributions are at maximum, you won’t gain anything at all by adding another year of maximum earnings, so the value is $0.00 (except for the enhanced portion in 2019 or later years).
However, if the least valuable of those 39 years was less than maximum, adding a year of maximum earnings would increase your age-65 retirement pension. For example, if the least valuable of those 39 years was at 25% of maximum, adding a year of maximum earnings would increase your age-65 retirement pension by about $22.61 (75% of $30.15).
Related article: How to calculate your CPP Post Retirement Benefit (PRB)
How does this value change if the contributor was in receipt of a CPP disability pension?
If someone receives a CPP disability pension, that period of time is excluded from their contributory period. That means that when their retirement pension is calculated, their earnings will be averaged over fewer than 39 years.
For example, someone who is permanently disabled at age 35 would have only 17 years in their contributory period (from age 18 to 35), and their age-65 retirement pension would be averaged over their best 14.1 years (83% of 17 years). This means that each year of maximum earnings that they had could be worth $83.39 towards an age-65 retirement pension ($1,175.83/14.1).
Related article: CPP disability benefit vs early retirement
How does this value change if the contributor is eligible to use the child-rearing provision (CRP)?
Similar to receiving a CPP disability pension as described above, if someone is eligible to drop out years under the CRP, their earnings will be averaged over fewer than 39 years, making each year of maximum earnings more valuable.
For example, someone who can drop out 10 years under the CRP would have their earnings averaged for their best 30.7 years (83% of the 37 years remaining in their contributory period after the 10 years of CRP are dropped out). This means that each year of maximum earnings that they had could be worth $38.30 ($1,175.83/30.7) towards an age-65 retirement pension.
How does this value change if the contributor has earnings in 2019 or later years, under the “enhanced CPP”?
Beginning with 2019 and for at least the next 40 years, adding one year of maximum earnings will always increase the amount of a CPP retirement pension, even if you already have 39 years of maximum earnings/contributions and even if you’re eligible for the advertised maximum of $1,175.83. That is because the maximum of $1,175.83 is just the base portion of the CPP, and earnings/contributions in 2019 or later years include an enhanced contribution which creates an enhanced component to the retirement pension calculation.
Related article: Understanding Enhanced CPP
The enhanced component to the retirement pension calculation actually contains two portions, known as the first additional portion and the second additional portion.
The first additional portion will replace 8.33% of the contributor’s first additional earnings, averaged over his best 40 years. This means that the first additional portion will one day be as much as $391.79 per month ($56,440 x 8.33% / 12 months), and each year of maximum enhanced earnings would therefore be worth $9.79 towards this first additional portion. Because the enhanced CPP is being phased-in over five years though, the actual value is lower for the years 2019 through 2023.
The second additional portion doesn’t take effect until 2024, and details on its value will be included in this article at some later date.
As you can see, the value of each year of maximum earnings depends on several factors and it can be as low as zero (prior to 2019 and the enhanced CPP changes).
If it wasn’t clear in the article, the amounts above refer to the monthly value towards a CPP retirement pension. It should be noted however, that there would also be value towards CPP disability or survivor pension amounts.
If each year’s CPP contributions is worth approximately $25 then is it safe to assume that if you continued to work and contribute the same amount to CPP that your Post Retirement Benefit will equal roughly $25/per year as well?
Yes, the formula for PRBs is similar. The only adjustment is based on the person’s age, whereby the PRB is adjusted up or down based on their age as of January in the year following the contribution (which is when the PRB is effective).
It’s not clear what you mean by “$25/per year” at the end of your question.
The increase due to each additional year of CPP contributions is quoted “per month”, so $25 per month is an extra $300 annually. Using 2020 numbers, $30 per month means an extra $360 per year in your CPP retirement pension.
Hi Adrian – Thanks for pointing that out. It hadn’t even registered to me that Dave had said $25 per year rather than $25 per month.
If I stop work at 60 (this year)and collect CPP at 70(2026) will payments be calculated using the average max of 60-65 or 66-70? If the later, would an increase of the max from $13110/yr to 17478/yr over 7 years mean a bump up of 24% for the increased maximums plus 42% for waiting for a total increase of 66% by the year 2026?
Wayne – If you start to receive your CPP at age 70, your pension will be calculated using the 5-year average YMPE for ages 66-70 regardless when you last works. And yes, you would also receive the 42% increase for delaying until age 70.
When you have some time, could you please update the numbers for this year (2017)?
Hi Adrian – Thanks for the reminder. I have updated the numbers above to reflect 2017 values.
Lets say I’m mid thirties right now, and only plan to work another 10-15 years (retire before 50). As a small business owner I’m trying to decide between how much salary vs dividends. To date I have intentionally been maxing out CPP contributions. But does it make any sense as it seems if I only work 20 years total I only can qualify for half the max best case.
Hi Jen – You’re right that 20 years of max earnings/contributions will only result in a CPP retirement pension of approx. 50% of max, but only you can decide whether that makes sense in your overall financial strategy. If you weren’t paying yourself this salary, how would that affect your current financial situation and how would it affect your retirement financial plans? One other thing to consider is that while you’re working and contributing to CPP, you also qualify for CPP disability protection, such as it is. And once you’ve made at least 10 years of CPP contributions, you’ve also qualified for some level of survivor’s benefits. I hope these points help to make your decision a bit easier?
Thanks Doug, great article, my take is for 2020 yr alone your total contribution if you max out your CPP will be $2,898.00 just to get back $30.00 a year added to your CPP pension . It would take 8.5 yrs to just get back one years contributions of $2,898.00 . With all the contributions you pay over a life time of working if you max out your CPP why is the pay out not much, much larger
Hi Mike – The $30 payback is per month, not per year. Try doing the math again using $360 per year.
If you have made 39 years of Maximum CPP Contributions and you just turned 65 years old in 2020, AND you continue to work to age 70, it sounds like you don’t have to make any more CPP contributions? Correct? Problem is the folks at Service Canada say IF you are employed you HAVE to contribute to CPP. The CPT 30 Form makes no sense in filling out because you want to continue working but you don’t want to start RECEIVING CPP benefits until you retire at age 70. One option as a Professional Corporation, is to start receiving a Dividend instead of salary from the corporation.
Any advice here as you have to consider the fact that as a Professional paying yourself a Salary also means you make Double CPP contributions, one as an employee and another as an Employer……does switching to receiving a Dividend make sense?
Hi Jan – Nowhere in this article or elsewhere have I said that you can stop contributing to CPP once you reach age 65, whether you have 39 years of maximum contributions or not. The only time that you can opt out of making CPP contributions is if you are over age 65 AND you are receiving your CPP retirement pension, and 39 years of maximum contributions is again not a factor. What I did say is that (ignoring the new enhanced CPP that started in 2019), once you have 39 years of maximum contributions, making any further contributions doesn’t increase your CPP benefit at all (again, ignoring the enhanced CPP).
You are correct though, that if you are an owner of a corporation and if you have the option to pay yourself in dividends, that would be a way to avoid paying CPP contributions, and that option exists at whatever age you happen to be.
What happens if you decide to draw your pension at age 60, but continue to work and pay the maximum contribution each year.
Then you will earn a post-retirement benefit for each such year. Read these articles:
I’m 66 in August and am working 10 days per month. The article did not state the $25 or $30 is per month or per year. I think it’s per month? My CPP will be poor so it’s important for me to know. I spent over 20 years south of the border so my pension will mostly be US based. I would like to ideally have my CPP, OAS, and HOOP be enough to live on. I don’t feel I get up to date information off the Canadian government site so your calculation, here is important. According to their site my CPP hasn’t changed in 5 years yet I have been working in Canada these past 10 years.
Hi Kevin – Yes, the amounts indicated are per month.
I will be 65 in a few months, early 2023. I have worked in Canada for 36 years, and contributed to CPP but only 30 those years made were maximum contribution. I’m intending to continue for three more years, and start collecting CPP at 70. Currently, I work for an investment Bank. My enquire is, should I continue to contribute CPP after 65 while working? Would it further enhance my CPP at 70?
Please let me know.
Hi Suresh – If you are going to wait until age 70 to start collecting your CPP, you must continue contributing to CPP right up to age 70. And Yes, those future contributions will increase your CPP benefit amount.