The CPP retirement plan enhancement could mean changes for your CPP benefits. Although you have contributed to your CPP before the changes, they still apply to you. An enhanced CPP proposal started in 2016, and the changes are finally starting to implement. Especially with the effects of the pandemic, the pension program may continue to change in the future.
It is important to understand your CPP benefits to make the most of your retirement pension. The CPP changes will be phased in over a period of 7 years, so your benefits will continue to change. Some of the main changes include increased employee and employer contributions. It is important to understand the changes in the enhanced CPP because it may likely affect you and your retirement income (see also the best RRSP funds that individuals can create to save for retirement and learn more about RRSP loans).
What is the Canada Pension Plan?
The Canada Pension Plan is a retirement income benefits program aimed to provide a portion of your earnings. It allows the employee and employer to contribute to the plan to help supplement income during retirement. The CPP contributions make up around a quarter to a third of your employment earnings. The current CPP contributions help to benefit you during retirement.
Like some of the other retirement savings plans, CPP earnings are subject to income tax when withdrawn. The plan is eligible for all Canadian residents, including those that are self-employed. There are two parts to the CPP including:
CPP Contributions
In order to receive the benefits of the CPP when you retire, Canadian employees must contribute a portion of their income based on the contribution rate. Employees over the age of 18 that make over $3,500 in a year must contribute a dedicated amount of their earnings. CPP enhancements and changes will alter the contribution rates and maximum pensionable earnings each year.
Employers are also required to contribute a set amount, matching the contributions of the employee. For those that are self-employed, you pay the entire CPP premium as well as a year’s additional maximum pensionable earnings, and a portion of their net business income. Since those that are self-employed do not have an employer to match their contributions, they contribute more annually.
When you retire or turn the age of 70, you stop contributing to your CPP. You may also choose to stop contributing if you are over the age of 65 and still working. At this time you are eligible to receive your CPP benefits.
CPP Retirement Benefits
Eligible Canadians can start receiving payments when they turn 65. However, there is also an option to start receiving benefits when you turn 60. This option comes with a penalty of 0.6% of your earnings if you choose to receive benefits before the age of 65. On the other hand, if you choose to delay your benefits past the age of 65, you may receive a bonus of up to 0.7% each month.
There are serious consequences and benefits to early or delayed withdrawals. If you choose to receive early earnings, there is a permanent reduction of 36%. On the other hand, delayed access to your benefits increases your benefits up to 42%. Since there are changes happening each year due to the CPP enhancement, you want to ensure that you are making the most of your benefits.
The benefits you receive depend on the duration and contributions you have made to the plan. One thing to note is that even if you have low earnings in certain years, the government will help to exclude the lowest eight years of earnings to help raise the average CPP benefits. To check how much earnings you will receive, you can check your My Service Canada Account to get an estimate.
What are the Changes to the Canada Pension Plan?
There are two main changes to the CPP that will phase in within the next few years. These changes include:
- A higher target payout rate. Previously, the payout rate for income replacement was 25% of employee earnings. Under the enhancement, the CPP retirement benefit will cover up to 33% of employee earnings up to the yearly maximum pensionable earnings. This is a significant raise that features a maximum annual pension of up to $17,500 with this new enhancement.
- A higher maximum income covered by the CPP. Before, the maximum income limit covered was $55,900. After the enhancement process is complete, the maximum income covered is $82,700, a significant increase. This allows even higher-income employees to be eligible to receive higher benefits. At the highest income rate, employees can receive up to an annual payout of $19,900.
These changes provide an average pension increase of around 33%. While people may benefit from these enhancements, there are changes to the contributions that help fund the CPP. The contribution changes occur in two different phases:
Phase 1
Phase 1 started in 2019 and will completely be in full effect by 2025. Phase 1 consists of an increase in contribution rate. The yearly additional maximum pensionable earnings increase 1 percent to an increase of 5.95% of YMPE. For those that are self-employed, you will pay an increased contribution rate for employee and employer contributions.
Phase 2
The second phase will start in 2024 and introduces an increased limit on the year’s additional maximum pensionable earnings. The YAMPE will exist with the YMPE and includes different contribution rates. In the first year, the rate is 107% of the YMPE. The year after, the rate is 114% of the YMPE. Like the YMPE, the self-employed will need to pay for employee and employer increases.
Who Benefits from the Changes of the Canada Pension Plan?
Even though the enhanced CPP plan benefits everyone with retirement savings, those that are just starting to work will feel the full effects of the enhancements. Those that have been making contributions and only have around 10 years or less, will not reap the full benefits of the enhanced CPP. The contribution rate increases for them, but the increase in average CPP benefits only raises 12%.
Why are These Changes Important?
These changes are important because there may be an increase in the contribution rate that you need to know about. Along with immediate changes, it is important to keep up to date with government changes in order to make the most of your CPP. Small changes can help employees with tax liabilities and contribution limits to secure their financial future.
Effects on CPP Disability Pension
The government enhancements on the CPP also have an impact on the CPP disability pension. There is an increase in CPP post-retirement disability pension. However, the amount of increase depends on how much you contribute and for how long. For those that received CPP disability pension before 2019 when the changes began, there are no changes to your CPP.
The Bottom Line
The government has begun to implement changes to the CPP in order to help secure peoples’ financial future. Although these changes benefit your retirement savings, there are annual changes now to take note of. It is also important to remember that the income is taxable during retirement.
Make sure to keep up to date on increased contribution rates and increased limits. This can help you make the most of your CPP and understand how these changes affect you.
