What is the Canada Pension Plan (CPP)?
TheCanada Pension Plan (CPP)is 1 of the main sources of retirement income for Canadian seniors. In Quebec, the program is known as theQuebec Pension Plan (QPP).
The CPP/QPP works with other government benefits, your personal retirement savings and workplace pensions to provide you with income after you retire.
To be eligible for CPP, you must:
- Be at least 1 month past your 59th birthday
- Intend for your CPP to start within the next 12 months
- Have worked in Canada and made at least 1 valid CPP contribution
What is the CPP enhancement?
Starting in 2019, the federal government began gradually enhancing the CPP. They’re doing it so today’s workers, by contributing a bit more to the CPP, will have higher benefits and greater financial stability when they become seniors in the future.
The CPP enhancement only affects those who work and contribute to the CPP in 2019 or after. It adds 2 additional top-up amounts to the base CPP.
The CPP now consists of:
- Thebase(or original CPP)
- Thefirst additional component phased in between 2019 and 2023
- Thesecond additional component to be phased in between 2024 and 2025
The CPP enhancement will increase the amount working Canadians receive in the CPP retirement pension, post-retirement benefit, disability pension and survivor’s pension. It will not affect eligibility for CPP benefits.
If you contribute to the QPP, a similar enhancement may affect you.
Why is the CPP enhancement necessary?
There are many reasons why the CPP enhancement is necessary:
- To reduce the number of families at risk that haven’t saved enough for retirement.
- The effect of inflation and the cost of living on retirement income.
- Younger workers are facing challenges which make saving for retirement more difficult.
- Pensions have changed to defined contribution plans from defined benefit plans.
How the CPP enhancement works
Until 2019, the CPPreplaced25% of your average work earnings. The federal government determined this average based on yearly annual pensionable earnings (YMPE) from employment or self-employment up to the maximum earnings limit in each year.
The enhancement means the CPP will begin to grow to replace33.33% of the average work earnings you receiveOpens a new website in a new windowafter 2019. The maximum limit of earnings protected by the CPP will also increase by 14% between 2024 and 2025.
The CPP enhancement will increase the maximum CPP retirement pension by more than 50% if you make enhanced contributions for 40 years.
If you’re an employee
Employers and employees contribute an equal amount to CPP.
Before January 1, 2019, employees and employers contributed to the CPP, 4.95% on the employee’s earnings between $3,500 and the annual earnings limit. Between 2019 and 2023, the contribution rate was increased in increments from 4.95% to 5.95%.
Starting in 2024, a second, higher earnings limit is being introduced so the CPP may protect more of your earnings. This new limit, known as theyear’s additional maximum pensionable earnings (YAMPE) won’t replace the original limit (YMPE). Instead, it creates 2 different ranges of earnings:
- Theoriginal range, which goes to the original limit
- Anadditional rangefor earnings between the original limit and the new one
This additional range of earnings covered by the CPP will start at theoriginal earnings limit (projected to be $71,200 in 2025), and go to the new earnings limitwhich will be 14% higher in 2025 and after (projected to be $81,100 in 2025).
If you’re self-employed
If you’re self-employed, you’ll contribute the employee and employer portions. Once the phase-in is complete, self-employed individuals will contribute:
- 11.9% on earnings in theoriginal earnings limit
- 8% on earnings between the original earnings limit and the new one
For both employees and self-employed people, the additional range only impacts you in years when your annual earnings amount is above the original earnings limit.
How CPP enhancements affect CPP disability pension and survivor’s pension
After 2019, the CPP enhancement also increases the CPP disability pension and CPP survivor’s pension.
For the CPP disability pension, the amount of the increase will depend on how much and for how long you contributed to the enhanced CPP. If you began receiving your disability pension before 2019, the enhancement will not affect it.
For the CPP survivor’s pension, the amount of the increase will depend on how much and for how long your deceased spouse or common-law partner contributed to the enhanced CPP. If you began receiving your survivor’s pension before 2019, the enhancement will not affect it.
How the CPP enhancements may affect your retirement savings plan
The CPP enhancement will benefit the most those for whom most of their working years will occur after 2019. It may change some of their calculations for post-retirement income amounts when it comes to calculating future government benefits.
If you’re retiring soon, you may see a small increase in your CPP income.
If you retired before 2019, you’ll see no increases in your CPP income beyond annual inflation increases.
Regardless of your situation it’s still a good idea to work with your advisor to create a proper retirement plan and check whether the CPP enhancement will impact that plan.
