On June 20, the finance ministers of the federal and provincial governments met to discuss broad changes to the CPP. They surprisingly came to a quick consensus and will be begin rolling out changes as of January 2019 with the program fully in place by 2025.
While this seems like a long time away, it’s good to know what is coming to be able to prepare. Details are still coming out so these are our best projections. As we get more information, we will update.
When you are working
Currently in 2016, employees pay CPP premiums of 4.95% on all earnings between $3,500 and $54,900. Employers also pay an equal matching amount for each of their employees, so the total premiums are 9.9% of earnings up to a maximum of $5,088.60.
- Under the new system, the maximum earnings will increase to $82,700, which will increase the total premiums you pay per year (but will also affect the CPP benefits received in retirement)
- Also, the contribution rate will go up by 1% to 5.95% for the employee and employer.
- The expanded portion of CPP will be a tax deduction instead of a tax credit on your personal taxes.
- EXAMPLE: Today, an employee earning $85,000 per year would pay $2,544.30 in CPP premiums over the year. In 2025, this same employee earning the same amount would pay $4,712.40 or approximately $180 more per month.
When you are retired
Though the increase in premiums may not be good news, it is a forced savings vehicle for a country of spenders. Very few people have workplace defined-benefit pensions anymore and even fewer are taking much advantage of the voluntary RRSP and TFSA programs to save for retirement. The enhanced CPP will allow seniors to collect larger monthly cheques and replace a larger percentage of their income.
Currently, the benefits are paid at one quarter of your average pensionable earnings over 40 years of employment (indexed for inflation). Since the current maximum pensionable earnings amount is $54,900, an employee who had earned the maximum each year through their working life, would receive the maximum benefit of $13,725 or $1,143.75 per month this year.
- Under the new system, benefits will be paid out at one third the average pensionable earnings. Therefore, the maximum pay out in 2025 would be $27,567 or $2,297 per month – double the current maximum.
So, for middle to high earners, the annual premiums will increase by up to 85% but the benefit will increase by up to 100%.
This may seem like a lot of information to absorb at once, but it’s our job to understand it – not yours. Let us help you make the strategic tax plans to make sure that no matter the situation, you are keeping the biggest piece of the pie possible.