Starting in 2019, the CPP will be expanded over a seven-year phase-in period. This means that today’s workers and employers must make higher contributions to the plan to shore up the income security for future generations. It has mass market implications for pre-retirees, and also for owner-managers of Canadian businesses.
Current Program: Under the current CPP rules, the plan’s objective was to replace 25 per cent of employment income to a maximum of approximately $51,000. The maximum CPP benefit is now $13,110, although most people do not receive the maximum. The average CPP benefit is approximately $8,000 per year.
New Program: Once fully in place, the CPP enhancement will increase the maximum CPP retirement benefit by about 50 per cent. In today’s dollar terms, the enhanced CPP represents an increase of nearly $7,000, to a maximum benefit of nearly $20,000.
What’s the cost now? Currently, the CPP premiums amount to 9.9 per cent of contributory earnings, when both employer and employee contributions are counted. Individual employees contributed up to a maximum of $2,564.10 annually in 2017, and their employers contributed an equal amount. These numbers are based on maximum contributory earnings of $51,800. Those who are self-employed must contribute both portions: that’s a maximum of $5,128.20 per year.
The premium changes: Proposed enhancements to the CPP would increase the premium rate by an additional two per cent (one per cent for employers and one per cent for employees) as well as increasing the maximum insurable earnings. As a result, more money will come off the top of workers’ pay, leaving less for voluntary contributions to self-funded sources like RRSP or TFSA.
A study conducted by the Fraser Institute estimates that a middle-income family (income ranging from $77,839 to $110,201) will pay an additional $2,250 per year on average.
Sources: Advisor.Ca, Dynamic Funds, Department of Finance