In 2019, the Canada Pension Plan (CPP) annual contributions have been gradually increasing. You may have noticed that your first paycheque of 2023 was a little lighter than usual, as CPP premiums have increased. This is the 5th year of a 7-year CPP enhancement schedule.
In exchange for paying enhanced contributions, CPP recipients can expect higher benefits when they begin receiving CPP payments in retirement.
Current CPP Payments
The base CPP program aimed to replace one quarter of your average work earnings between the first $3,500 of earnings up to the “yearly maximum pensionable earnings” or YMPE.
Presently, we contribute 4.95% of our income up to the YMPE limit of about $60,000. For base case retirees, this translates to a maximum of around $1,300 of CPP starting at 65.
In order to receive the maximum CPP benefit, you must make full CPP premium contributions for ~40 years between ages 18 and 65. Ultimately, most people do not receive the CPP maximum benefit in retirement.
Enhanced CPP Payments
As cost-of-living increases, the CPP enhancement program aims to increase the monthly benefit for future CPP recipients.
The goal of the enhanced CPP program is to provide replacement income in retirement of about a third of the higher YMPE limit, or a maximum of about $2,000 per month.
Under the enhanced program, you will contribute 5.95% of your earnings up to the new YMPE max of about $80,000. This will translate to about $2,000 of CPP monthly retirement income (base case).
I’m about halfway through my working career, what monthly CPP benefit can I expect?
For those of us who are in the midst of our working careers, we’ll partially partake in the enhanced program. As a result, we can expect our monthly CPP income at retirement to be around halfway between the current and future max CPP benefits, or around $1,500 per month (base case).
Overall, the enhanced CPP program is a good thing. CPP is a well-funded, well-managed program that is inflation-indexed. Yes, we will all face an increased CPP premium obligation in our working years; however, the benefit will outweigh the cost for the majority of us.
What we’ll get in exchange for increased CPP premiums is an increased CPP benefit at retirement. This means less pressure to provide income replacement via a retirement portfolio.
As you approach retirement age, you will be able to obtain a CPP benefit estimate from Service Canada.
As always, please contact our office with questions.