Planned increase in CPP contributions on January 1 will hit some workers harder due to pandemic
On January 1, contributions to the Canada Pension Plan increase again – more than what was originally expected. Much of this is due to the pandemic’s effect on the labor market – and observers say the impact will be felt by some workers more than others.
Here’s a look at what happens and how long the effect will last.
Why are premiums increasing
The January 1 increase is part of a multi-year plan approved by the provinces and the federal government four years ago to increase pension benefits through the public plan by increasing contributions over time.
The first premium increase was in 2019, another earlier this year and the next is due in early 2021.
A note from KPMG in November said maximum employer and employee contributions would reach $ 3,166 each in 2021, an increase from $ 2,898 this year. For self-employed workers’ contributions, the maximum amount will be $ 6,332, compared to $ 5,796.
Why next year is different
The plan requires that contributions increase in line with the upper limit of earnings subject to these premiums.
For next year, the earnings cap – known as the Maximum Annual Pensionable Earnings, or YMPE – was supposed to be $ 60,200, an increase of $ 1,500 from the 2020 limit. But the actual amount is going to be higher – $ 61,600.
The reason is due to the effects of the pandemic on the labor market and the way the YMPE is calculated.
The formula for calculating the earnings cap is based on the increases in average weekly earnings recorded during the year ending June 30, compared to the same number in the previous 12 month period.
During the pandemic, average weekly earnings have increased, but not because people are earning more.
More low-income workers than higher-paid workers lost their jobs between March and June, meaning there were fewer low-wage workers factored into the calculation. Office of the Chief Federal Actuary says this is why the overall increase is larger than initially expected
Dan Kelly, president of the Canadian Federation of Independent Business, estimates that anyone who gets closer to the maximum pay limit will actually see a 9.3 percent increase in bonuses, beyond just over five percent. of the law.
“It will amount to hundreds of dollars in CPP reassessments on the paycheques of middle-income Canadians, not because they got a raise, but because the formula didn’t have a COVID adjustment,” Kelly said.
“We think this is deeply unfair.”
Provincial finance ministers had asked the government to halt increases for next year, pointing to the economic fallout from COVID-19, but that was easier said than done.
Any change in contribution rates or the earnings ceiling, at which point the additional contribution, would require the approval of Parliament and seven provinces representing at least two-thirds of the national population. This is a higher bar than what is required to amend the Constitution.
Federal officials say they expect the effect of the higher pay limit to wear off over time, as jobs continue to return after large losses earlier in 2020.