The Canada Pension Plan (CPP), together with the Old Age Security (OAS) program, forms the cornerstone of Canada’s retirement income system. There are other retirement savings options available to Canadians, but the CPP is unique in that it is Canada’s only compulsory retirement savings program.
Canadians can, of course, contribute to registered retirement savings plans (RRSPs) and individuals who were residents of Canada for at least 20 years of their adult lives will be able to receive OAS benefits after age 65. And, an ever-decreasing minority of Canadians can look forward to receiving payments from an employer-sponsored registered pension plan (RPP).
However, despite the availability of these options, the hard fact is that many Canadians, now in the work force, will not have enough income from all sources, public and private, to ensure a financially comfortable retirement – or even, in some cases, to provide a reasonable standard of living.
While most Canadians will receive OAS payments, even the maximum benefit receivable (currently less than $7,000 per year) isn’t enough to live on. Most Canadians will not be receiving benefits from an RPP and, while changes have been made in recent years to encourage taxpayers to accumulate private retirement savings through an RRSP, the fact is that many working Canadians do not make RRSP contributions each year and those who do usually contribute much less than the allowable maximum.
The Department of Finance estimates that one-third of Canadian families who are nearing retirement and do not have workplace pension plans are at risk of having their current after-tax family income drop by more than 40% following retirement. Faced with that reality, the federal and provincial governments have moved to make changes which would increase the amount of retirement income received by Canadians.
Those changes will come about through enhancements to the CPP, which will mean higher CPP retirement benefits for the next generation of Canadian workers.
The benefit of increasing Canadians’ retirement income through changes to the CPP is that, unlike contributions made to an RRSP, saving for retirement through the CPP isn’t voluntary. Working Canadians are required by law to make contributions, with the contribution amount set by the CPP, deducted from the employee’s gross pay and remitted to the federal government on their behalf.
And, all contributions made by an individual Canadian worker are matched by his or her employer and similarly remitted to the federal government on his or her behalf.
Once the employee chooses to begin receiving CPP retirement benefits (anytime between age 60 and age 70), the amount of monthly benefit received will depend, for the most part, on the amount of contributions made over the individual’s working life.
The changes to be made to the CPP, which will be implemented over a seven year period beginning in 2019, are significant. The goal of increasing the amount of CPP benefits, which can be received by retired Canadians, will be achieved through both an increase in the percentage of income contributed by Canadians each year and in the maximum amount of income on which those percentage contributions are based.
Right now, Canadian workers are required to contribute 4.95% of their gross income, to a maximum income (known as the “year’s maximum pensionable earnings”, or YMPE) of $55,300. In calculating CPP premiums, the first $3,500 of income is excluded. Consequently, the maximum premium payable by an employee is $51,800 ($55,300 minus $3,500), times the contribution rate of 4.95%, or $2,564.10. With the employer’s matching contribution, the maximum total contribution amount credited to the employee’s CPP “account” for the year is $5,128.20. (Self-employed taxpayers are required to pay both the employer and employee portions of CPP contributions for the year.)
The current goal of the CPP program is to provide a retirement benefit equal to a maximum of 25% of earnings up to the YMPE, which is itself intended to approximate the average Canadian wage. However, given that contribution amounts are limited by the YMPE, individuals earning more than that amount will not be contributing at a rate which will provide the desired income replacement of 25% of average lifetime earnings. As well, although the maximum annual CPP retirement benefit in 2016 was $13,110, most individuals do not receive that amount. The average annual CPP retirement benefit received in 2016 was about $7,500.
The changes to the CPP, which are intended to address these concerns, will be implemented over a seven-year period starting in 2019. Percentage contribution rates will be increased, with the goal of raising the income replacement level to one-third of earnings. As well, a new, separate contribution will be payable in respect of earnings above the YMPE.
The changes will be implemented over the following time frame.
- Increased contribution rates for the CPP will be phased in, starting in 2019. Figures released by the federal government indicate that an individual who earns at least the YMPE will pay about $6 per month in additional premiums in 2019. By 2025, that individual will be paying an additional $43 per month in premiums. Expressed as a percentage, the CPP contribution rate will increase by 1% for both employers and employees between 2019 and 2023.
- Beginning in 2024, a separate contribution rate, which is projected to be 4% each for employers and employees, will be payable for earnings above the YMPE, to an upper earnings limit. The federal government expects that, upon full implementation in 2025, that upper income limit will be about $82,700. Both employers and employees who are required to make this additional contribution will both be able to claim a deduction for such contribution made when calculating taxable income.
Other, consequential, changes will also be made to the tax system. To help mitigate the impact of increased CPP contribution rates on lower-income Canadians, increased benefits will be provided under the Working Income Tax Benefit, a refundable tax credit that supplements the income of individual Canadians earning less than about $20,000 annually.
More details of the upcoming changes to the CPP can be found in a Backgrounder issued by Finance Canada.
