CPP enhancements: what to tell clients

This story was updated on Mar. 25 to account for CPP changes proposed in the 2019 federal budget.

According to the Department of Finance, middle-class Canadians are worried they aren’t saving enough for retirement. Finance Canada estimates that 24% of families nearing retirement age are at risk of not having adequate savings to maintain their current standard of living in retirement.

Several factors have contributed to the reduced savings, including the dwindling popularity of defined benefit pension plans. More Canadians are required to save for retirement on their own and Finance Canada found that many Canadians were not saving as much as they should. To counter this, the government introduced enhancements to the Canada Pension Plan (CPP) that began on Jan. 1.

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, which are being phased in gradually. People who receive their pensions in 2065 or later should see as much as a 50% increase in their CPP benefits compared to what they would have been prior to the enhancements. That’s great news for workers who’ll contribute to CPP for the next 40 years, but it will likely not be as beneficial for individuals who are at or near retirement now.

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

Effects of the enhancements for CPP pensioners

What do these enhancements mean for Canadians between the ages of 60 and 70 who are currently receiving CPP?

People between 60 and 65 who are still working are required to contribute to CPP. Those who continue to work after 65 have the option to keep making contributions to CPP until they are 70. If they choose to contribute, their employer is required to do so as well. Self-employed individuals are responsible for both the employer and employee portion of their CPP premiums.

If someone is receiving CPP while working and contributing to the plan, 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 contributed the maximum 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 yearly maximum pensionable earnings (YMPE) of $55,900, and the self-employed rate was 9.9%. Phase 1 of the new CPP regime, which began on Jan. 1, 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%

In the second phase, the government will increase the YMPE in both 2024 and 2025 and introduce a second 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

The enhancements will not affect clients between the ages of 65 and 70 who are taking their CPP pension and not contributing to CPP. 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 earning $45,000 will make an average additional monthly contribution of approximately $6, which translates into additional monthly 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 (all figures in 2019 dollars). The longer someone contributes to the enhanced CPP, the bigger their retirement benefit will be.

The 2019 federal budget proposed to automatically enrol CPP plan contributors who are 70 or older in 2020 and have not applied for their retirement benefits. The government realizes that some people do not want to receive CPP because it could reduce their federal or provincial income-tested benefits. As a result, they have proposed to extent the period for which someone can choose not to receive the CPP retirement pension from six months to one year.

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 will be most affected by these changes and will benefit the most when they retire.