Understanding the “Enhanced CPP” changes

In June 2016, the Minister of Finance announced an agreement in principle with the provinces that would “strengthen the Canada Pension Plan (CPP) for future generations.” These proposed changes became known as the enhanced CPP, and the legislation to enact these changes (Bill C-26) has now received royal assent.

What are the changes to the CPP?

The first change that you’ll notice is an increase in the cost of CPP contributions from a total of 9.9% to a total of 11.9%. This change will occur gradually over five years, according to the following schedule:

Time period

Employee contribution rate

Employer contribution rate Self-employed contribution rate

Currently

4.95%

4.95%

9.90%

Jan. to Dec. 2019

5.10% 5.10% 10.20%

Jan. to Dec. 2020

5.25% 5.25%

10.50%

Jan. to Dec. 2021

5.45% 5.45%

10.90%

Jan. to Dec. 2022

5.70% 5.70%

11.40%

Jan. 2023 and later 5.95% 5.95%

11.90%

 

The above contribution rates apply to all pensionable earnings that are above the Year’s Basic Exemption (YBE) of $3,500, and below the Year’s Maximum Pensionable Earnings (YMPE), which is $55,300 for 2017. These earnings from 2019 forward will be known as “first additional pensionable earnings.”

Another change to the CPP under Bill C-26 is a higher ceiling for earnings on which contributions will be required, which is called the Yearly Additional Maximum Pensionable Earnings (YAMPE.) This change will be phased-in over two years, with a 7% increase in 2024 (to $59,100 in 2017 dollars) and a 14% increase in 2025 (to $63,000 in 2017 dollars).

The total contribution rate for earnings between the YMPE and the YAMPE will be 8.0% (4.0% each for both the employee and the employer) and these earnings will be known as “second additional pensionable earnings.”

Related Article: How much will you get from Canada Pension Plan in Retirement?

Aren’t CPP pensions increasing as well?

Yes, the good news is that these increased contributions will allow the enhanced CPP to replace 33.33% of your Piggy bank image used for article on the enhanced CPP“average lifetime earnings” rather than the current 25%. Along with the higher YAMPE, this will result in a maximum retirement pension being approximately 50% more than it is currently.

The not-quite-so-good news is that this increase is being phased-in over a 45-year period. That means that no one will receive this 50% higher maximum retirement pension until 2065.

That doesn’t mean that pensions won’t be increasing before then. Pensions will start to increase slowly, beginning in 2019. The following table shows approximately how much of an increase someone will see in their monthly age-65 retirement pension (2017 maximum is $1,114.17), if they’re earning at or above the YAMPE level each year.

Year of earnings

Maximum amount of increase

2019

$1.39

2020

$2.78

2021

$4.64
2022

$6.96

2023

$9.28

2024

$11.83

2025 and after

$14.45

 

These increases are cumulative though, so that if you earned at the YAMPE level for the seven years of 2019 through 2025, your maximum retirement pension in 2026 would be $1,165.51 ($1,114.17 + $51.34), and the maximum will continue to increase by $14.45 for each year of additional earnings at the YAMPE level for 2026 and beyond (up to a maximum of 40 years of earnings in total).

Using this formula, the maximum CPP retirement pension in 2065 (in 2017 dollars) will be approximately $1,692.17 monthly ($1,114.17 + (40 x $14.45)), or approximately $20,313 yearly.

Related Article: How to Calculate your CPP Retirement Pension

Wrapping up on Enhanced CPP

As you can see, if you’re thinking of applying for your CPP earlier than 2025, the enhanced CPP will be of little value to you. However, for each year of pensionable earnings beyond 2024, the changes mean that your maximum CPP retirement pension will be approximately 1.3% more than under the current rules.

Written by Doug Runchey

Doug Runchey worked for the Income Security Programs branch of Human Resources and Skills Development Canada for more than 32 years, and was a specialist in the Canada Pension Plan and Old Age Security legislation, regulations and policy areas. He now runs his own company, DR Pensions Consulting, which provides pension advice, including detailed calculations for CPP retirement planning and “credit splitting” purposes. Doug can be reached by email @ [email protected] or check out his website at http://www.drpensions.ca/.

36 Responses to Understanding the “Enhanced CPP” changes

  1. CPP is such an incredibly bad return on investment that it’s very nearly just a tax. A pension would track your contributions and offer returns/payouts similar to what you pay in and include a principal amount.

    CPP payout compared to modest market rate investments are incredibly poor.

    CPP is essentially tied to inflation today. Based on this assumption lets do some math…

    find a compound interest calculator like this one http://www.moneychimp.com/calculator/compound_interest_calculator.htm

    enter your personal contribution (hint this year it’s 2564.10 assuming you make more than the approx $54K a year)

    now remember the Gov demands your employer contribute an equal amount also (Self employed you contribute both!). So times 2.

    assume a conservative rate of return 5% (remember this is a MASSIVE fund that can usually at least match average market returns of 7% or better over the long run. Particularly given how much CPP are paying their investor team!)

    5% return on your $2554.10×2 yearly contirbution would be $545,072.36 in principal! (in 2017 $’s!)
    now the enhanced current max payout of the $’s YOU contributed is just under $14,000 a year… No ownership of the principal. No passing to your heirs.

    Conclusion:
    Horrible return – look to the 4% safe withdrawal rule with that principal and one can see there is a huge gap on the CPP payout vs if this was a real investment/RRSP/TFSA/Pension fund.

    I agree a minimum safety net is required but taking money from people in a falsely marketed “Pension” is scary. It leads some to believe they will be looked after when the opposite is true. One has to disregard CPP and invest on your own!

    Perhaps a solution would be the Australian model that better matches a pension vs Canadian CPP that starts to look remarkably like a tax.

  2. It is great that they are increasing but I will be long gone before anyone gets the maximum. I am a year away from 65. I think that employers should contribute more twice as much as they do. And really this is poverty level pensions. So how is this addressing the current issues. Our government is partially responsible for the current state of affairs with people having little to no pension when they changed the rules a long time ago now allowing companies to go from defined benefit to defined contribution. And correct me if I am wrong but were companies also required to provide pensions.

    • I agree. Employers should take a minimum of 10% of the employees salary and invest it in an RRSP for them, as most don’t seem capable to invest it themselves.

      • Everyone wants employers to pay. Where does that money come from? Are increased wholesale and retail prices acceptable? Ultimately there are only “X” dollars in the system.

        • Bruce,

          My thoughts exactly. And consider that one employer – governments at levels – is funded by the non-government employees’ income taxes.

          Government employees are actually funding themselves with their income taxes, lavishly I think.

          • Don’t comment on something you don’t know anything about. The Government already deducts a minimum of 10% of an employees pay to put into their “gold plated pension plan” which is invested for them. Look it up, it is called the superannuation contribution rate. They also pay income taxes like everyone else on their income.

            People don’t want government telling them what to do with their money so the government entices them with the RRSP and yet a lot of people still won’t save thinking the CPP and OAS will be enough. Then they bash the public servants who are forced to save 10% of their pay for having a nice pension.

        • My comment was that employers should take a minimum of 10% of the employees salary and invest in an RRSP for the employee. Therefore there would be no additional cost to the employer, other than paying a living wage.

          • Murray.. I see your point better now. Sadly many people have limited knowledge in saving or investing. Mandating 10% savings would work well for those people. Let’s go one step further. Employees can pick one of a) mandatory 10% investment that remains owned by the employee and can be moved to another employer OR OR OR participate in CPP. I’d take the 10% solution and never contribute nor draw from CPP.
            What a concept..Id be responsible for my own financial well being.

  3. Jim:
    As with anything else, nobody thinks about us who are already on pension!
    Food prices are rising, gas going up, medical bill which are not covered by OHIP.
    We have to live on the on the meage pensions we have.
    Even the Govt ignores us in their budgets

      • I think part of the reason people are so disillusioned about the CPP in particular is how it’s been presented for decades and because of the illusion its name implies.

        Too many people people are cajoled into “the nanny state” will take care of me.

        The CPP is not a pension plan because no one can live comfortably on the benefits, or at all if you’re single.

        The CPP is not a pension plan.

        It is a Personal Pension Plan supplement.

        The CPP is indexed at a fictitious rate that will never keep up with any level of inflation.

        The CPP is not a pension plan because it is not a pension fund; the personal and employer contributions – 10% of one’s salary to an earnings ceiling – are not accumulated in one’s name and the benefits end upon death. A Personal Pension Fund becomes part of one’s estate upon death.

        Too many people think they don’t earn enough to consider accumulating a Personal Pension Fund, when they actually can, especially when it’s part of daily living starting with one’s first job – whatever that job is.

        Basic financial literacy is non-existent in Canada. In school, any school level, we are taught the capital of Peru (useful?), but nothing about something as basic to a retirement strategy as “the rule of 72”.


        ••
        •••
        People like Don can earn money from their retirement capital. But too many are distressed because they find out upon retirement that the CPP is nowhere near enough, even combined with OAS and GIS. They find out that their RRSP goes up in smoke because of the outrageous amount of income tax withheld and then assessed on April 30th.

        They worry. Complain. Rage at the nanny state that isn’t. The same energy and amount of time could be spent making their retirement capital work for them and generate actual cash.

        When faced with welfare, when I retired 15 years ago, I went looking for ways to make my meagre capital generate cash – nothing else but monthly cash, the only objective/target I had. It is almost very easy today with the Internet and discount brokers and Google, and TMXMONEY, and email from companies and fund managers.

  4. I still maintain that CPP, OAS and GIS are a Personal Pension PlanI still maintain that CPP, OAS and GIS are a Personal Pension Plan supplement and not an actual pension plan as the name implies.

    As stated in Doug’s comprehensive information, the CPP is intended to replace 33.33% of your “average lifetime earnings”, which is an insult to all lower income earners.

    Therefore, everybody needs to spend some time prior to retirement to learn about building a Personal Pension Fund that can support you when you retire, even before age 65 or whatever age you will be when you wish or need to retire.

    Your Personal Pension Fund needs to generate enough income to support you, based on today’s lifestyle, adjusted for some reduced expenses (work related, no children) and for some new expenses (medical, cruise).

    Then use the rule of 72 (Google “rule of 72”) to estimate what that number will be for inflation, which the government is targeting at 2-3%.

    If your figure for today’s cost of living expenses would be $40,000, inflation is 3%, your annual pre-tax income would be $80,000 in:
    72 ÷ .03 = 24 years

    How to generate $40,000 in pre-tax income, today? The next item is how to mitigate the income tax burden when retired.

    $40,000 today. How much capital can give you that: depends on the return on investment (ROI). A 10% ROI requires $400,000. A 5% ROI requires $800,000. You decide how much ROI and capital accumulation you can achieve.

    You decide which type of investment you feel good about (that’s a learning curve) and then decide how high the return on investment you feel good about (another learning curve). See if the strategy you are using today can get you there; for most people, you won’t get there.

    How to find and then decide:
    =====================
    google tmxmoney dividend screener
    to get
    https://web.tmxmoney.com/screener.php?locale=EN

    click add criteria

    Hints:
    • eliminate all criteria except “Exchange”
    • select Current Dividend Yield
    • change Condition to >= then 5
    • you’ll get ±350 results
    • click “Edit Columns”
    • click “View more columns”
    • deselect most useless fields for our purposes; keep
    Symbol Company Name Price
    • select “Dividend” then “Yield” and “Yield 5 year average”
    • click Save
    • click the Yield column to sort by Yield (up or down)
    • if you copy the >7% results and paste them to a spreadsheet, you’ll have a list of ±150 TSX stock/funds that pay over 7%
    • these are the headings/columns I used:
    Symbol Company Name Price Dividend Volume Yield Yield (5 Y…

    Now it’s up to you. Finding is easy: feel good about takes a while.

    Mitigate income taxes:
    ================
    The last thing you want to spend retirement income on is taxes.

    The first step available to Canadians since 2009 is the TFSA used properly as a Tax Free Investment Account.

    Try to avoid a large RRSP/RRIF because its withdrawals cost too much in income tax. What you might do is delay CPP payments and replace them with withdrawals – which are also very expensive in fees and sales taxes. Remember that all of an RRSP will be 100% taxable when you die or decide to retire in another country.

    What is left as a Personal Retirement Fund account? The only real pragmatic and very inexpensive solution (after the net capital is over $50,000) is a Margin Account at a discount brokerage of your choice (also a learning process).

    In the Margin Account, invest in the financial products you selected using TMXMONEY. One word about Margin Loans: they cost about 5% (October 2017), are 100% tax deductible and can be used to purchase tax-advantaged financial products that generate whatever you’ve chosen with TMXMONEY: 7%? 10%? 12%? 15%?

    The progressive planners (some may be worriers) will take the time to have a happier retirement because they will have sufficient monthly income to achieve their chosen retirement activities. These planners will reduce their Kardashian time or TMZ time to do something profitable.

    It takes more time when starting and very little when monitoring – a few minutes a day: monitoring is like checking if the soup is ready – it’s reassuring.

    I know, I know, it’s a lot to read and I didn’t even discuss the types of tax-advantaged incomes.

  5. If I were to stop working at age 60 in 2022, but not collect my CPP until age 65 in 2028, would I still get the benifits of the enhanced pension even though I only contibuted more for a few years?

      • Could Rod do this instead…
        Contact CPP and see where he is at regarding number of years contributing. If he is at the maximum, opt out of contributing anything further for the final 5 years (may only be possible for self employed who take dividends). Take the equivalent of what he would have handed to the government and self manage it. At $2500/yr for 5 years he will have at least $12,500 in a cash account. That’s a lot more that a measly $16/mo X 12 months X 30 years = $5760.

        • Hi Bruce – The short answer to your question is “No”. CPP contributions are never optional for salaried employees, unless they are over age 65 and already receiving their CPP. There is the other option as you suggest, for self-employed people who may be able to take their earnings in the form of dividends instead of salary.
          I should give you a slightly longer answer though, as you (and maybe others?) have misunderstood the numbers a bit. The $16/mo increase in Rod’s CPP that I mentioned is just how much the extra “enhanced contribution” portion would increase his CPP. That enhanced contribution portion would have totaled only $880.60 for the four years of 2019 thru 2022 (0.15% for 2019, 0.3% for 2020, 0.5% for 2021 and 0.75% for 2022) whereas the regular contribution portion of 4.95% would have totaled approx. $10,256 (4 x $2,564.10).
          It’s only the extra $880.60 contribution that would have increased his CPP by $16/mo and the other $10,256 could increase his CPP anywhere from a further $0/mo to $114.28/mo (read this article: https://retirehappy.ca/much-one-year-maximum-cpp-contributions-worth/ )

  6. I retired june/16 age 65.Will the enhancement help my wife(65)and myself?I am receiving $1092 but your article states $1114?Could you let me know why i wouldnt receive the latter?Thanks.Tom O’Neill

    • Hi Tom – If you’re already receiving your CPP, the enhancements won’t help you at all. The max for CPP starting in 2016 was $1,092.50 and it’s $1,114.17 for pensions starting in 2017.

        • Hi Tom – Once your CPP pension is in pay, it’s indexed yearly based on increases in the cost of living (as measured by the CPI). That doesn’t always match exactly with the increase in the maximum new pensions, which is based on increases to the YMPE (which reflects wage increases).

          • Thanks doug.In 2016 i had a total of 39 yrs of max contributions and maybe thats why i didnt receive the full cppp.?

          • Hi Tom – If you had 39 full years of max contributions and started your CPP at age 65 in 2016, the amount of your CPP should have been $1,092.50 in 2016 and it should have increased to $1,107.80 effective January 2017. If this is not what you are receiving, send a copy of your CPP statement of contributions to me at [email protected] and I’ll check it out for you.

  7. As detailed as Doug’s information is, CPP will still be insufficient for Canadians to retire on.

    Since the revised CPP plan is meant to address 33.33% of your “average lifetime earnings”, it is still an insult to all lower income earners.

    OAS becomes necessary and possibly trigger GIS benefits for lower income earners.

  8. How about those who are already retired. Say at age 72 and could use a better income? Anything in sight for those no longer in the work force? A “fix” for those in a fixed income position would help………Strengthen the current system for those already there would be good for the country!

  9. Something needs to be done. Making “how money works” should be integrated in the educational system so people are aware and mindful of how retirement really looks like and encourage people early in life to start getting ready for retirement the moment they get their first paycheck. Get people to be on the saving mode rather than spending mode,etc.

    • Angelina,

      I totally agree with your “how money works” comment.

      But the emphasis must be on making the money work. It’s a tool or something like protein. Money is too often paired with emotions such as “the root of all evil”.

      Saving should be renamed “allocating” rather than be confused with a discount on a loaf of bread.

      TFSA should be renamed TFIA, I for investment. RRSP would become RRPF – Pension Fund.

      Neither are Savings accounts.

      Angelina, you are also right about starting early, regardless of the earnings of the first job are.

      Someone wrote in this blog that ½ million dollars can be accumulated with the current CPP payroll taxes. That means that if an individual puts away double the CPP contribution amount that appears on the pay cheque stub in a Margin Account, one would easily accumulate $500,000.

      Finally, CPP should be renamed CPPSNI as in Canada Personal Pension Safety Net Insurance.

  10. Ive been critical of recent “retire happy” articles for the lack of depth. This however is a great article and the comments very thought-provoking.

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