• 2970, Drew Rd. Suite 202-C Mississauga, ON L4T 0A5
  • 437-428-2828
  • info@trupax.ca
Get a quote






Low CPP, Big Retirement Gap: A Wake-Up Call

by Admin

Investments Posted on Tuesday, July 1, 2025 at 11:01 PM

For self-employed individuals, low contributions to the Canada Pension Plan (CPP) can lead to a significantly reduced pension at retirement, impacting their financial security. Understanding how CPP works, why self-employed contributions are often lower, and alternative retirement planning strategies is crucial. 


How CPP Works and Contributions Are Made

The Canada Pension Plan (CPP) is a mandatory social insurance program providing retirement, disability, and survivor benefits to Canadians. It is designed to replace about 25% of your average pre-retirement income, up to a maximum, based on your contributions over your working years (Canada.ca, 2024).

  • How Contributions Work:
    • Employees: Employees contribute 5.95% of their pensionable earnings (up to the Yearly Maximum Pensionable Earnings, or YMPE, set at $68,500 in 2024) through payroll deductions. Employers match this contribution, totalling 11.9% (Canada.ca, 2024).
    • Self-Employed: Self-employed individuals must pay both the employee and employer portions, totalling 11.9% of net business income (after expenses, up to the YMPE). Contributions are made when filing annual taxes via the Canada Revenue Agency (CRA).
    • Contribution Impact: The amount you contribute directly affects your CPP pension. Higher contributions over a more extended period result in a larger pension, while low or inconsistent contributions reduce it.

In 2024, the maximum monthly CPP retirement pension at age 65 is $1,364.60; however, the average is only $816.25, due to varying contribution levels (Canada.ca, 2024). For self-employed individuals, contributions are often lower, resulting in pensions that are significantly below this average.

Why Self-Employed Contributions Are Lower

Self-employed individuals, such as insurance brokers or small business owners, face unique challenges with CPP contributions. These challenges, including business expense deductions and inconsistent income, underscore the need for alternative retirement planning strategies.

  • Business Expense Deductions: Self-employed individuals can deduct business expenses (e.g., office costs, travel, and marketing) from their income to reduce their taxable income. While this lowers taxes, it also reduces net business income, which is the basis for CPP contributions. For example, a self-employed broker earning $100,000 in revenue but claiming $60,000 in expenses contributes based on only $40,000, significantly lowering their CPP pension.
  • Inconsistent Income: Self-employed individuals often experience fluctuating income, which can result in years of minimal or no contributions, ultimately reducing pension benefits.
  • Impact on Retirement: A 2023 Statistics Canada report found that self-employed Canadians receive 30% lower CPP pensions on average than employees due to lower contributions. For instance, a self-employed individual contributing $40,000 annually instead of $68,500 (2024 YMPE) could receive a pension as low as $500–$600 per month, compared to $1,364.60 for maximum contributors.

Low CPP contributions mean relying heavily on personal savings or other income sources, which can increase financial stress and potentially lead to delayed retirement or a reduced lifestyle.

Consequences of Low CPP Contributions

  • Reduced Retirement Income: A lower CPP pension (e.g., $500/month vs. $1,364.60) limits your ability to cover essentials like housing, healthcare, or leisure, especially as living costs rise. The Old Age Security (OAS) pension ($713.34 per month, maximum in 2024) may help, but combined, these benefits often fall short of meeting retirement needs.
  • Financial Strain: Without adequate savings, self-employed individuals may deplete investments or rely on family, as seen in cases where Canadians turned to GoFundMe for medical costs due to insufficient funds.
  • Mental Health Impact: A 2023 Canadian Mental Health Association study noted that 60% of retirees with low income experience stress and anxiety, underscoring the need for robust retirement planning.

Alternative Retirement Planning Strategies for the Self-Employed

To compensate for low CPP contributions, self-employed individuals can adopt these unpaid strategies to build a secure retirement, offered by Trupax Financial:

  1. Registered Retirement Savings Plan (RRSP)
    • How It Works: Contribute pre-tax income to an RRSP, reducing taxable income while saving for retirement. Withdrawals are taxed in retirement, ideally at a lower rate.
    • Benefits: RRSPs allow tax-deferred growth, and contributions can offset low CPP benefits. For example, contributing $10,000 annually at a 5% return could grow to over $600,000 in 30 years.
    • Action: Maximize your RRSP contribution room (18% of earned income, up to $31,560 in 2024).
  2. Tax-Free Savings Account (TFSA)
    • How It Works: Contribute after-tax income to a TFSA, with tax-free growth and withdrawals. The 2024 contribution limit is $7,000.
    • Benefits: TFSAs offer flexibility for retirement or emergencies, complementing CPP. For instance, $7,000 annually at 5% could yield $250,000 in 20 years, tax-free.
    • Action: Use TFSAs for supplemental savings, especially for healthcare costs not covered by provincial plans
  3. Personal Investment Portfolio
    • How It Works: Invest in low-cost ETFs, mutual funds, or dividend stocks outside RRSPs/TFSAs to build wealth.
    • Benefits: Diversified investments can generate passive income, helping to offset a low CPP. For example, $50,000 invested at 6% annually could grow to $287,000 in 30 years.
    • Action: Collaborate with Trupax Financial to develop a customized portfolio that strikes a balance between risk and growth.
  4. Disability and Critical Illness Insurance
    • How It Works: Disability insurance replaces 60–85% of income if you’re unable to work, while critical illness insurance provides a lump-sum payout (e.g., $50,000) for conditions like cancer.
    • Benefits: Protects income during working years, preserving savings for retirement. Unlike CPP Disability ($1,060 per month, average, 2024), individual policies offer higher, tax-free benefits.
    • Action: Add these to your financial plan to safeguard against income loss, as discussed in our disability insurance blog.
  5. Maximize CPP Contributions Strategically
    • How It Works: Limit excessive business expense deductions to increase net income for CPP contributions, balancing tax savings with pension growth.
    • Benefits: Higher contributions boost your CPP pension, reducing reliance on other savings. For example, contributing $60,000 versus $40,000 annually could increase your pension by $200–$300 per month.
    • Action: Consult a tax advisor to optimize deductions while prioritizing CPP contributions.

Shortcomings of Relying Solely on CPP and OAS

  • Low Benefits: The combined CPP and OAS benefits ($816.25 + $713.34 = $1,529.59/month max, as of 2024) are insufficient for most retirees, covering only 30–40% of the average living costs in Canada (Statistics Canada, 2023).
  • Eligibility Delays: CPP Disability requires severe, prolonged conditions, with approval delays of months, unlike immediate private insurance payouts.
  • No Flexibility: Government benefits lack customization, unlike RRSPs, TFSAs, or private insurance tailored to your needs.

Take Control of Your Retirement Today

Low CPP contributions, especially for self-employed Canadians, can jeopardize your retirement dreams. At Trupax Financial Limited, we specialize in creating personalized retirement plans with RRSPs, TFSAs, investments, and insurance solutions. Don’t let low CPP benefits limit your future. 

Search
Categories