Personal Finance

What is the actual CPP Benefit calculation formula?

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  • Jun 21st, 2016 6:44 am
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Deal Guru
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Nov 18, 2005
11955 posts
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Kingston

What is the actual CPP Benefit calculation formula?

I recently used Service Canada's CPP Benefit calculator and am skeptical of the results so I would like to perform the full calculation myself.

It allows you to provide assumptions about how much you would make from now until age X, and then from age X to 65.
When I assume $0 from now until 65, my monthly benefit is $847.
When I assume $48,300 (max) from now until 65, my monthly benefit is $916.

I'm shocked at how little continuing to pay into CPP for another 17 years will impact the benefit amount.

Does anyone know what or where the actual formula is? Couldn't find it via Google searches.

Thanks.
17 replies
Deal Addict
Aug 28, 2010
3521 posts
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Halifax
First of all, it's based on your best 40 years between the ages of 18 and 65. (Actually, I believe it's based on your best 480 months, but anyway...)

So if you work from the age of 18 to 65, 7 of those years are going to be ignored. (Or is it 8 years... I'm not sure if they stop counting when you turn 65 or when you turn 66).




Anyway, to simply things, I'm going to ignore the 480 months rules, and just treat it as the 40 year rule.

  • Each year the amount of CPP you paid is recorded as a percentage of the maximum. So if you paid the maximum CPP for that year, you would get 100. If you paid 50% of the max, you would get 50. If you paid $0 into the CPP, you would get a 0.
  • You then take your best 40 years, total the amount you paid in and divided it by 4000, to see what percent of the maximum CPP benefit you would get.



For example, if you worked 20 years full time and paid the max CPP each year and 20 years part time (or 20 years at a lower paying job) and only paid half the max each year, you would receive:

20 * 100 = 2000
20 * 50 = 1000
2000 + 1000 = 3000
3000/4000 = 0.75 = 75%


So you would receive 75% of the maximum benefit.

If you had actually worked 20 years paying the max CPP and 27 years (instead of 20 years) paying half the max, it wouldn't make a difference. You would still receive 75% of the max benefit.
Deal Guru
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Nov 18, 2005
11955 posts
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Kingston
THANKS!

Found some additional details on the "best years":
[INDENT]The CPP recognizes that most people have periods when they are not in the paid labour force. To compensate for periods of unemployment, illness, schooling etc., up to 15% of your low-earnings periods are not counted toward your CPP benefits.

Likewise, periods of lower earnings when you were at home caring for children under the age of seven can be excluded when calculating your CPP benefits. Other periods may also be excluded from the calculation, such as times when you received a CPP disability benefit.

Note: Starting January 1st, 2012, there will be an increase in the general drop-out provision;
Effective January 2012: from 15% to 16%.
Effective January 2014: from 16% to 17%.[/INDENT]

Also found that the factor above is applied to the number of years from 18 until you start receiving benefits which can be as early as 60.

Knowing all that, the calculation that Service Canada has provided me DEFINITELY doesn't make sense.
Deal Addict
Feb 24, 2007
1371 posts
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You must have done something wrong, that doesn't sound right. Even if you were contributing the maximum amount to the CPP since 18, that still leaves 10 years worth of difference, which is about 25% of the CPP value. So the difference between 0 and max CPP contribution should be around $240 (25% of $960, the current maximum). More then likely is it looks like the calculator is using the difference between max CPP contribution and your average contribution rate over your lifetime, because the difference is to small to be max and 0.
Deal Guru
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Nov 18, 2005
11955 posts
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Kingston
I played around some more with The Service Canada calculator and confirmed that doesn't work when you choose $0 for future earnings (even though it is offered as a choice in their drop-down list). It seems to put in your average earnings in todays dollars whenever you enter $0. I got a more reasonable result when I put in $5000 for future earnings.

I can get my Excel calculator to about the same number for the current estimate based on the above description of the calculation, but it is still off by more than I'd like for the future estimate. Must be another part to the calculation.
Deal Addict
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Dec 12, 2012
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Courtenay
JWL - Are you still interested in a more detailed CPP calculation. If so, I can explain exactly how it's done.
Newbie
Dec 1, 2012
11 posts
3 upvotes
SAULT STE MARIE
Even if JWL has got his answer, I'm curious. If you'd take some time to explain, I'd be grateful.

Thanks!
Member
Aug 1, 2008
284 posts
50 upvotes
Toronto
Dogger1953 wrote: JWL - Are you still interested in a more detailed CPP calculation. If so, I can explain exactly how it's done.
Me too; as I'm trying to run scenarios to calculate my CPP benefits as well.
Deal Addict
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Dec 12, 2012
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Courtenay
OK, it's basically a 5-step process. I'll explain each step briefly, and then you can ask more questions on each step if anything is unclear.
1) Escalate each year's UPE to current year value (actually to the average of the last 5 years of YMPE). This is similar to using % of UPE vs YMPE, but will give you a more accurate answer. This escalated earnings is called the adjusted pensionable earnings (APE).
2) Apply the appropriate dropouts. The general dropout (formerly 15%, now 16% and soon to raise to 17% dropout) applies to everyone, and the child-rearing dropout (CRDO) would be the next most common. Do the CRDO first (if applicable), and then apply the 15-17% dropout.
3) Calculate your "average monthly pensionable earnings" (AMPE) by adding together all of your remaining APE and dividing by your remaining number of contributory months (starting Jan/66 or when reached age 18 and ending whenever you're projecting to start your retirement pension minus the number of months that you dropped out).
4) Multiply your calculated AMPE by 25%, and this is your age-65 retirement benefit (this is the easy step). This is know as your RTRFBC (retirement for benefit calculation).
5) If starting your retirement benefit at other than age 65, adjust up or down by the age adjustment factor (used to be 0.5% for every month early/late, but currently converting to 0.6% reduction for every month early, and 0.7% increase for every month late).
Newbie
Mar 16, 2013
1 posts
Dear Dogger 1953,

I found your explanations very very helpful. Thank you!
I have a further question for you. I am 66 yrs old now, still working and still contributing to CPP. Having been an immigrant to Canada when I was 30, I started late contributing. In addition, I have been abroad, without contributing for a few years. So I can still increase, I think, the CPP benefit that I will get when I choose to go for it. ( at present I plan this for when I will be 70.)
Now, what is not totally clear to me is how the contributions that I make after having reached the age of 65 ( in december 2011) , how these contributions are treated. The question is double : 1. How are these contributions used for the calculation of the CPP benefit, and 2. does the 0.6% and 0.7% increase for every month late apply to this, or not? Many thanks for advising. Best regards.
Deal Addict
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Dec 12, 2012
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CPPstudent wrote: Dear Dogger 1953,

I found your explanations very very helpful. Thank you!
I have a further question for you. I am 66 yrs old now, still working and still contributing to CPP. Having been an immigrant to Canada when I was 30, I started late contributing. In addition, I have been abroad, without contributing for a few years. So I can still increase, I think, the CPP benefit that I will get when I choose to go for it. ( at present I plan this for when I will be 70.)
Now, what is not totally clear to me is how the contributions that I make after having reached the age of 65 ( in december 2011) , how these contributions are treated. The question is double : 1. How are these contributions used for the calculation of the CPP benefit, and 2. does the 0.6% and 0.7% increase for every month late apply to this, or not? Many thanks for advising. Best regards.
CPPstudent - I didn't mention it in my description of "dropouts", but there is an over-65 dropout provision that will apply to you. For every year that you contribute after age 65, you can drop out a previous year of low or no contributions. This over-65 dropout is in addition to the general dropout (and the CRDO if you qualify. So, the answers to your questions are:
1) CPP contributions after age 65 can replace previous years of lower contributions to increase your average lifetime earnings, and thereby increase your CPP benefit calculation, and
2) Your calculated CPP benefit will now be increased by 0.7% for every month after age 65 that you delay in applying for your CPP retirement pension. This is true regardless whether or not you're still working and contributing to CPP after age 65.
Deal Addict
Aug 28, 2010
3521 posts
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Halifax
Yes, it's adjusted for inflation each year.
Deal Addict
Oct 21, 2012
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Toronto
After 2016 if you take CPP at age 70 do you get 42% more than you would have gotten at age 65 rate, or 42% more at the new inflation adjusted rate at age 70?
Deal Addict
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Dec 12, 2012
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Courtenay
joey1234 wrote: After 2016 if you take CPP at age 70 do you get 42% more than you would have gotten at age 65 rate, or 42% more at the new inflation adjusted rate at age 70?
Joey - You would get 42% more than the age-65 rate, adjusted to a 2016 value based on the 5-year average YMPE ending 2016, so in a nutshell, the inflation-adjusted rate at age 70.
Deal Addict
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Dec 12, 2012
1217 posts
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Courtenay
SnoopyandWoodstock wrote: Hi, I found a retirement income calculator that is really good, but I can't find the Service Canada's CPP Benefit calculator. Here is a comprehensive one on the government site: https://srv111.services.gc.ca/generalinformation/index/

Where is the one just so I can calculate my CPP, though?
Thank you, S.
SandW - Here are the steps to calculate your CPP: http://retirehappy.ca/how-to-calculate- ... t-pension/
Member
May 9, 2013
322 posts
254 upvotes
Lower mainland BC
I found this calculator to be fairly accurate:
http://www.northernraven.ca/financial/C ... lator.html


Enter your earnings data like the example below and press calculate. You can enter child drop out years in the advanced settings.
You copy paste your CPP data from the service canada site.


Date of Birth: aug 1955
1973 $14.19 $1,246.00
1974 $45.51 $4,805.00
1975 $116.23 $7,157.00
1976 $69.10 $4,639.00
1977 $91.38 $5,974.00
etc...

if there are a range of years like "1982 to 1986 $0 $0"
replace with individual years of zero as follows:

1982 $0 $0
1983 $0 $0
1984 $0 $0
1985 $0 $0
1986 $0 $0

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