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The Canada Pension Plan (CPP) is a contributory, earnings-related social insurance program. The benefit you get when you retire depends
on how much you contribute.
Some argue that CPP is a tax, not a pension. This argument is based on two facts. First, it is very expensive. You contribute more than $4,600 a
year (4613.40 in 2012, the number will increase by $100 each year. The number is for self-employed, if you are working, you contribute half
and your employer contributes the other half). for 40 years and you only get around $900 a month (based on 2012 dollar, will be adjusted with inflation)
when you retire. Someone has calculated that it is 4 times more expensive than a private pension plan. Second, it is mandatory; as long as you receive
a working income, or self-employment business income, you have to contribute and you can't opt out of the plan.
Others say it is a good pension. It is indeed mandatory, but your future benefit is guaranteed. Unlike other employer sponsored pensions, CPP has
no funding shortage for the next 75 years. Private pensions might be cheaper in the past, but in a slowing economy with a low investment
return, CPP might perform better than other private pensions.
Whether or not CPP is a good pension might depend on your specific financial situation and it is up to you to decide.
If you think CPP is a tax, you might want to pay as little of it as possible. For example, you can opt out CPP contributions immediately after you turn 65.
If you own a corporation, you pay yourself dividends instead of salary to avoid CPP completely (at the expense that you won't accumulate RPSP
contribution room).
If you think it is a good pension, you might want to pay into it as much as possible in order to get more money when you retire. You can use the Service Canada
website to calculate how much you will get based on your contributions. To contribute more, you can elect to pay contributions on non-T4 working
income like tips and gratuities. If you have more than one employer and the total income is less than $50,000, most likely your T4 slips are under-deducted and
you can contribute more by filing form CPT20. When you are receiving CPP retirement benefit and you are between 65 and 70, if you still have working income,
you can keep contributing.
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