CPP enhancements start in 2019: how much more you’ll pay and how much you’ll receive
Prepare to start footing the bill for gradually increasing the amount of retirement income paid out by the Canada Pension Plan over the next four and a half decades.
The process of improving the usefulness of the CPP for retirees will result in seven years of increasingly higher contributions by workers and employers starting January 1. Benefits will start to increase immediately following the enhancement, but only by symbolic amounts over the next few years. The full increase in pension benefits from 33% to 52% from current levels – the exact increase depends on your income – will be available to new retirees in 2065.
The purpose of these changes is to make the CPP a more important factor for the ever-growing majority of the population who do not have a company pension plan and who may not have enough savings to maintain. his standard of living in retirement. The most recent figures from Statistics Canada show that 37.5% of workers were covered by a pension plan in 2016.
Today’s CPP is designed to replace 25 percent of your income up to a specified limit. By 2065, the CPP will cover 33.3% of income up to the limit. Figures from the Department of Finance show that the current maximum annual retirement pension of $ 13,610 would be worth about $ 20,750 in 2018 dollars at the time of the CPP enhancement process, or $ 7,140 more per year.
Those who are new to the workforce will be the main beneficiaries of the CPP enhancements. But how will CPP reform affect those who retire in five years? “It hardly makes sense,” said Doug Runchey of DR Pensions Consulting. “That might give them five more dollars a month, and that’s about it.”
Before we look at how improving CPP will affect your paycheck in 2019 and beyond, let’s cover some basics. You and your employer also divide the cost of your annual CPP contributions, with your share rising to 5.1% of pensionable earnings in 2019, up from 4.95% this year (self-employed individuals participating in the CPP must pay all of the contributions).
Pensionable earnings are your earnings up to a cap that increases each year to reflect rising wages, minus a basic exemption which in recent years has been set at $ 3,500. In the pension world, this cap is called the annual maximum pensionable earnings, or YMPE.
The 2019 YMPE is $ 57,400 – subtract the personal exemption of $ 3,500 and you have CPP contributions indexed to a maximum income of $ 53,900. The Department of Finance says that at this level, the increase in CPP contributions for an employee in 2018 would be about $ 3 more on each bi-monthly paycheque in 2019, or about $ 81 for the year.
Contribution rates for both employees and employers will rise to 5.95% in 2023 and then stabilize. Then comes a second phase of increasing CPP contributions. In order to increase CPP retirement income in the future, increasing contribution rates will be applied to an increase in income beyond the YMPE.
You will pay additional CPP contributions on any pensionable income between the YMPE and $ 61,400 in 2024 and between the YMPE and $ 65,400 in 2025 (these figures are in 2019 dollars). An 8 percent contribution rate – 4 percent for workers and 4 percent for employers – will apply to earnings between the YMPE and higher ceilings.
The improvement in the CPP will not reach its pace until 2065, raising a question of fairness for those who retire well in advance and pay higher contributions immediately.
Geoffrey Rubin, senior managing director and chief investment strategist at the CPP Investment Board, said the CPP enhancement was designed so that every cohort of the population has the opportunity to withdraw what they paid for. This includes people who will be retiring soon and therefore not. make significant contributions to the enhanced CPP. “They won’t invest a lot because they’re starting late in their careers, and they won’t come out a lot,” Mr. Rubin said.
The CPP disability benefit and the survivor benefit will be indirectly affected by the enhancements to the CPP retirement pension. Mr Runchey, the retirement consultant, said both of these benefits are calculated using the retirement benefit as the basis.