CPP Enhancements and What Your Clients Need to Know | Mackenzie Investments

CPP Enhancements and What Your Clients Need to Know

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Jackie Power
Tax & Estate Planning

According to the Department of Finance middle class Canadians are worried they are not saving enough for retirement.  Based on data from the 2012 Survey of Financial Security (Statistics Canada) the Department of Finance estimates that 24% of families nearing retirement age are at risk of not having adequate retirement savings to maintain their current standard of living in retirement.  Several factors contributed to the reduced retirement savings including the reduced popularity of Defined Benefit pension plans.  More Canadians are required to save for retirement on their own and the government found that many Canadians were not saving as much as they should.  To counter this the government introduced enhancements to CPP beginning January 1, 2019.  Prior to 2019 CPP was designed to replace one quarter of an average Canadian's earnings in retirement, this will increase to one third under the new CPP enhancements.   The enhancements are being phased in over time so pensioners receiving their pension in 2065 or later should see an increase in their CPP retirement pension of up to 50% in comparison to what their pension would have been prior to the enhancements.  That's great news for workers who'll contribute to CPP for the next 40 years but will likely not be as beneficial for individuals who are at or near retirement. 

The enhancements will also apply to CPP disability pensions for individuals under 65.  If someone becomes disabled and has already started taking CPP they will receive a payment in addition to their regular CPP pension.  In addition the government has changed the CPP survivor's pension, providing a flat payment of $2,500 to the contributor's estate.. 

Effects of Enhancements for CPP pensioners

What do the enhancements mean for Canadians between 60 and 70 who are currently receiving CPP?  Someone working and between 60 and 65 are required to contribute to CPP.  For those who continue to work after 65 they have the option to continue making contributions to CPP until age 70. If they choose to contribute their employer is required to do so as well, or they can elect not to contribute after age 65. Self-employed individuals will be responsible for both the employer and employee portion of CPP premiums. If they are receiving CPP and continue to work and make contributions to CPP, the Post Retirement Benefit (PRB) they receive is determined by how much was contributed to CPP the previous year, and the individual's age when the PRB began.  If they contribute the maximum the amount to CPP the PRB will be equal to 1/40 of the maximum CPP retirement pension. 

In 2018 both employer and employee CPP contributions were 4.95% up to a YMPE of $55,900 and the self-employed rate was 9.9%.  Phase 1 began January 1, 2019 and increases contribution rates gradually from 2019 to 2023 as outlined below.

Year

Employer/Employee Increase

Employer/Employee Rate

Self-Employed Rate

2019

0.15%

5.10%

10.2%

2020

0.15%

5.25%

10.5%

2021

0.25%

5.45%

10.9%

2022

0.25%

5.70%

11.4%

2023

0.25%

5.95%

11.9%

 

Once the first phase is complete, a second phase begins in 2024 and the government will increase the Yearly Maximum Pensionable Earnings (YMPE) in both 2024 and 2025.  They will also introduce a second earnings ceiling for CPP earnings outlined below.

Year

Projected Yearly Maximum Pensionable Earnings

Projected Yearly additional maximum pensionable earnings

2024

$67,700

$72,400

2025

$69,700

$79,400

 

For clients between 65 and 70, who are taking a CPP pension and not contributing to CPP the enhancements will not affect their CPP pension.  The older an individual is the less time they will have to contribute to the enhanced CPP and as a result the less they will benefit from it.  Let's look at an example - a 60 year old who is making $45,000 will make an average additional monthly contribution of approximately $6 which translates into additional CPP benefits at 65 of approximately $15.  For a 30 year old making the same amount the average additional monthly contribution they will make to age 65 is $58 which translates into an increased monthly CPP pension at 65 of approximately $657.  The longer someone contributes to the enhanced CPP the bigger their retirement benefit will be.  These are in 2019 dollars.

Summary

It's important for your working clients to be aware of the changes to CPP and for those between the ages of 65 and 70 they need to decide if they want to continue to contribute to CPP.  Your younger clients are the ones who will be most affected by the changes but they are the ones who will benefit the most when they retire. 

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A version of this article appeared on advisor.ca on March 20, 2019