On June 20, 2016, Finance Ministers from eight provinces and the federal government signed an agreement in principle to enhance the Canada Pension Plan (CPP). This enhancement will improve retirement incomes for the next generation of seniors and help families plan toward saving sufficiently for retirement.
To fund the enhanced benefit all employees and employers will contribute more to the CPP. Increased contribution rates will be phased in over seven years, starting January 1, 2019. The gradual phase-in period will enable individuals, employers and the economy time to adjust to the increased contribution rates.
Understanding the Canada Pension Plan
The CPP is a high-quality savings tool that provides a guaranteed, secure monthly income stream to Canadian workers when they retire. The CPP retirement benefit currently replaces a maximum of 25% of earnings, up to the Year's Maximum Pensionable Earnings (YMPE), which approximates the average Canadian wage and is indexed to average wage growth annually. An individual's benefit is computed based on his or her actual earnings and contributions history. In 2016, the maximum annual benefit provided by the CPP to an individual who retires at age 65 is about $13,100; the average annual benefit is about $7,700.
All employees and the self-employed contribute to the CPP throughout their working lives. Employees contribute 4.95% on earnings between $3,500 and the YMPE ($54,900 in 2016), to a maximum of $2,544 in 2016. Employers equally match all contributions made by employees. Self-employed individuals contribute both the employee and employer share, representing 9.9% of earnings between $3,500 and the YMPE, to a maximum of $5,089 in 2016.
Details of the Proposed CPP Enhancement
The proposed CPP enhancement:
- Increases the earnings replacement under the Plan from one quarter to one third, and extends the range of pensionable earnings by 14%.
- Once fully phased in, the enhancement will increase the maximum CPP retirement benefit by about 50%.
- In 2016 dollar terms, the maximum benefit provided under the enhanced CPP increases by nearly $7,000 per year, to a maximum benefit of nearly $20,000.
Enhanced benefits will gradually build up as individuals pay into the enhanced CPP, with maximum enhanced benefits achieved in about 40 years. Current retirees or those retiring before 2019 will not have contributed to the CPP enhancement and therefore will not receive enhanced benefits.
The CPP enhancement will require contributions to increase gradually beginning January 1, 2019 as follows1:
- For earnings up to the YMPE, employee and employer contributions will increase by one percentage point each, from 4.95% to 5.95%, phased in from 2019 through 2023.
- Starting in 2024, a new contribution rate of 4% each by the employee and employer will apply to earnings above the YMPE up to the new Upper Earnings Limit.
- The Upper Earnings Limit is estimated to be $74,900 in 2024 (107% of the YMPE), growing to $82,700 in 2025 (114% of the YMPE).
- After 2025, both the YMPE and the Upper Earnings Limit will continue to grow in line with average wage.
Table 1: Contribution Rate Phase-in
(CPP1 refers to existing CPP; CPP2 refers to the enhancement.)
Notes: The YMPE and Upper Earnings Limit amounts in the table are projections prepared by the Office of the Chief Actuary. The contribution rates in the table are estimates, and will need to be officially confirmed by the Office of the Chief Actuary and are subject to secondary design decisions.
Impact on Employees
Table 2: Additional CPP Contributions for Wage Earners of Various Levels (pre-tax)
* Based on earning thresholds and contribution rates shown in Table 1 which need to be officially confirmed by the Office of the Chief Actuary and subject to secondary design decisions. Assumes constant nominal earnings.
Tax Deductibility of Employee Portion of CPP contributions
Employee contributions to the enhanced portion of the CPP will be deductible in the calculation of taxable income. A tax credit will continue to apply to employee contributions to the existing CPP.
Table 3: After-tax cost of Additional CPP Contributions for Wage Earners of Various Levels
* Based on earnings thresholds and contribution rates shown in Table 1 which need to be officially confirmed by the Office of the Chief Actuary and subject to secondary design decisions. Assumes constant nominal earnings. Assumes the deduction for the $25,000 wage earner reduces tax by 26% (15% federal rate; 11% provincial rate); and for the $55,000 and $85,000 wage earners reduces tax by 33.5% (20.5% federal rates; 13% provincial rate).
Impact on Employers
Employers will be required to match all employee contributions (as depicted in Table 2). This means that the proposed CPP enhancement will increase employer contributions gradually, starting in 2019 and continuing until 2025. Contributions will increase by about 0.1% of employee wages in 2019, gradually rising until 2025 to about 0.9% of employee wages for those employees earning up to the YMPE, and to as much as 1.3% of employee wages for those whose earnings are around the Upper Earnings Limit.
Employer contributions to the enhanced portion of the CPP will be deductible in the calculation of the employer's taxable income, as are existing employer CPP contributions.
More details and federal contact information related to the CPP enhancement can be found at Finance Canada's website Background on CPP Enhancement.