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How CPP enhancements affect your clients

Photo of Jacqueline Power, AVP Tax and Estate Planning

Jacqueline Power

AVP, Tax and Estate Planning

A fulfilling and financially secure retirement is a common goal among Canadians, yet for many it is also a source of some anxiety. According to the 2019 Canadian Financial Capability Study* only 56% of Canadians are confident they will achieve their retirement goals, down from 65% in 2014. Not surprisingly, concern is highest among Canadians who do not have a plan; of that group only 28% are confident they will have sufficient retirement savings. Among those who are actively saving, 68% feel they will achieve their goals.

Several factors contributed to the reduced retirement savings, including the reduced availability of Defined Benefit pension plans. More Canadians are required to save for retirement on their own and the study found that many Canadians were not saving as much as they should. 

CPP enhancements

To address this anxiety, the government introduced enhancements to the Canada Pension Plan (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 of up to 50% compared to what their pension would have been without the enhancements. That's great news for workers who'll contribute to CPP for the next 40 years but will likely not be as helpful for individuals in or near retirement.

The enhancements will also apply to CPP disability pensions for individuals under 65. If a CPP recipient becomes disabled, they will receive a payment in addition to their regular CPP pension. The government has also changed the CPP death benefit, providing a flat payment of $2,500 to an eligible contributor's estate.

How this affects current 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 is required to contribute to CPP, while those who continue to work past 65 may choose whether to continue making CPP contributions until age 70. If they choose to contribute, their employer is required to do so as well. 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 amount to CPP, the PRB will be equal to 1/40 of the maximum CPP retirement pension. 


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%

 

A second phase begins in 2024, in which 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 YMPE

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.  

 

Summary

It's important for your working clients to be aware of the changes to CPP. Those between the ages of 65 and 70 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. 

 

* Financial Consumer Agency of Canada.

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