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Top 5 Myths About the Canada Pension Plan

The Canada Pension Plan (CPP) is an important source of retirement income for many Canadians. But, some people have misunderstandings about how it works. Here, we will clear up the top 5 CPP myths with factual information.

Myth #1: The CPP Fund is Running out of Money

One of the most widespread CPP misconceptions is that the CPP fund is going bankrupt or running out of money. However, that’s false. The CPP Investment Board invests contributions professionally and currently maintains more than $500 billion in assets. The fund is durable for at least the following 75 years, and the CPP is financially stable. The CPP remains solvent even during recessions and market downturns.

As more baby boomers retire, they receive increasing payouts. Nevertheless, contributions from current workers and investment income cover CPP costs entirely, and the CPP is not bankrupt contrary to popular belief.

Myth #2: The CPP Contribution Rate is Increasing

Another falsehood about CPP is that the payment rate is rapidly rising. Currently, workers and employers pay 5.7% each on pensionable earnings up to $61,600 in 2022.

While contribution rates have slightly increased over time, the rate is currently consistent. The latest increase was phased in gradually between 2019 and 2023, with no sudden spikes.

Modest and gradual hikes may occur over the next decade to cover rising expenses. However, the CPP payment rate is not growing exponentially despite misconceptions.

Myth #3: You Can Opt Out of CPP Contributions

Unlike RRSPs, working Canadians over 18 who earn more than $3,500 annually are required to contribute to the CPP. Both employers and employees must contribute to the CPP based on pensionable earnings.

There’s no way to opt-out of CPP contributions unless one is receiving CPP disability benefits. Even self-employed Canadians have to pay into the CPP. While you can stop contributing once you reach age 65 and start receiving CPP payments, you cannot completely opt out of CPP contributions.

Myth #4: CPP Benefits Are Tax Free

Unlike Old Age Security (OAS) benefits, CPP retirement pensions are not completely tax-free. While a portion of CPP benefits are non-taxable, a significant percentage is considered taxable income.

Once your income (including CPP) exceeds a threshold ($79,845 in 2022), up to 50% of CPP benefits become taxable at your marginal tax rate. So you will likely pay some income tax on CPP pension payments depending on your total income level in retirement.

Myth #5: CPP Death Benefits are Small

Many people in Canada believe that CPP death benefits given to survivors are not much. However, this is not true because these benefits can be significant.

If the person who passed away was eligible for a CPP retirement pension, their spouse can receive a one-time death benefit of $2,500 and a full survivor’s pension. A surviving spouse with low income may even get over $500 in monthly benefits.

Additionally, until they turn 18 (or 25 if they are a student), orphaned children may receive continuous CPP survivor benefits. CPP death benefits are important because they provide substantial monthly payments and a lump sum.

For millions of Canadians, the Canadian Pension Plan is the basis of a secure retirement. It is crucial to have the correct information and disregard any false beliefs to plan well for one’s retirement. While there are criticisms and misconceptions, the CPP is financially and administratively sound.

Frequently Asked Questions

Q1: Is the CPP really running out of money?

A1: No, this is a myth. The CPP Investment Board professionally invests the fund's assets and has over $500 billion available. Contributions and investment income cover costs. The CPP is sustainable for at least 75 years.

Q2: Are CPP contribution rates increasing dramatically?

A2: Contribution rates have seen only modest, gradual increases to keep pace with costs. The latest increase was phased in slowly between 2019 and 2023. The rate increases are not exponential.

Q3: Can I stop contributing to the CPP if I want to?

A3: No, CPP contributions are compulsory for working Canadians earning over $3,500 per year. You cannot opt out unless receiving CPP disability benefits. Even self-employed must contribute.

Q4: Will CPP benefits be completely tax-free in retirement?

A4: No, CPP benefits are partially taxable. Once income exceeds a threshold, up to 50% of CPP benefits can become taxable at your marginal tax rate. Taxes payable depend on total income.

Q5: Are death benefits from the CPP minimal?

A5: No, CPP death benefits can be substantial for survivors. Spouses may receive a lump sum and monthly pensions. Orphaned children also receive ongoing benefits.

Q6: Can I collect CPP if I retire early?

A6: Yes, you can begin collecting CPP as early as age 60 but at a reduced rate. Your benefit would be cut by 0.6% per month before age 65. It's best to delay CPP until at least 65 if possible.

Q7: What is the maximum CPP benefit I can receive?

A7: For 2022, the standard maximum monthly CPP benefit at age 65 is $1,253.59. However, you can receive higher enhanced benefits if you delay starting CPP until age 70.

Q8: Do I stop contributing to CPP when I begin my pension?

A8: Yes, CPP contributions stop once you start receiving your retirement pension, usually at age 65. You contribute only while working between age 18 to 65.

Q9: Can I receive CPP if I have never worked?

A9: No, you must have contributed to the CPP through pensionable Canadian employment earnings for a minimum of 10 years to qualify for a monthly retirement pension.

Q10: How is my CPP benefit calculated?

A10: Your benefit is based on your average monthly pensionable earnings over your entire working career. Years with lower or zero earnings are factored in which affects the average.