**Updated for 2017 rates**

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. I stand by that statement as a reasonable average, but it doesn’t apply in all situations.

A more accurate answer can be calculated by dividing the maximum CPP retirement pension amount ($1,114.17 for 2017) by 39 years. If we do this, we find out that one year of maximum contributions is worth $28.57.

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).

## 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 $31.96 ($1,114.17/34.86 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 2017), we find that each year of maximum contributions is worth only $20.46 towards an age-60 retirement pension.

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 $40.57($28.57, 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.

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 $21.43 (75% of $28.57).

## 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 $79.02 towards an age-65 retirement pension ($1,114.17/14.1).

## 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 $36.29 ($1,114.17/30.7) towards an age-65 retirement pension.

## Summary

As you can see, the value of each year of maximum earnings depends on several factors and it can be as low as zero.

If you are wondering whether it makes sense for you to make further CPP contributions (this applies mostly to self-employed individuals who may have the option to pay themselves in dividends or salary), contact me at [email protected].

For a relatively small fee I can calculate what your future contributions will be worth to you, and possibly save you hundreds of dollars in unnecessary contributions.

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?

Dave

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).

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.

Hi Doug,

When you have some time, could you please update the numbers for this year (2017)?

Thanks,

Adrian

Hi Adrian – Thanks for the reminder. I have updated the numbers above to reflect 2017 values.

Hi Doug,

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.

Thanks

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?