Changes to CPP

Changes to CPP

July 2016

Recently the federal and provincial governments came to an agreement on enhancing the Canada Pension Plan (CPP). The federal government hopes to finalize the agreement by July 15. There are a number of proposed changes which will have varying impacts on Canadians.

The biggest change is the increase in benefits. At the moment, for income up to $54,900, CPP aims to replace 25% of pre-retirement income. The replacement rate will increase to one third. The maximum pensionable earnings will also increase,from $54,900 to $82,700.  These changes will increase the benefits Canadians receive from CPP. Under the current system the maximum benefit at age 65 is roughly $13,110 a year, because of the above mentioned changes that will increase to $17,478.

Under the proposal there was no change to the age in which can Canadians can access CPP.The normal start date is still 65. As well the pension can still be delayed until 70, or taken as early as 60.

Under the current plan a worker and his or her employer each contribute 4.95% of the workers income to CPP. This contribution rate applies to annual income between$3,500 and $54,900. That will change, the contribution rate is increasing to5.95%, meaning the employer and the employee will both have to pay more into CPP. The increased contribution rate will be phased in over five years,beginning in January 2019. By the time the higher contribution rate is fully phased in, a worker earning $50,000 a year will pay an additional $465 a year in premiums.

The increase in maximum pensionable earnings from $54,900 to $82,700 will be phased in over two years. The contribution rate for income between $54,900 and $82,700will be lower, it is expected to be 4% instead of 5.95%.

Increasing the CPP contribution rate is designed to act as a mechanism of forced savings. Folks will have to put more money from each pay cheque into CPP. To help offset some of the financial burden the federal government has agreed to two measures. For lower income Canadians they have agreed to expand the working income tax benefit. The current program offers a payout of $1,800 for a family earning less than $28,000 a year, the proposal is to enlarge the benefit. In addition,for high income earners the government has proposed allowing the contributions on income above $54,900 to be tax deductible.

Current retirees will not receive additional money. Their benefits will remain the same. In addition the proposed changes are phased in over time so folks retiring soon or planning on collecting their CPP in the next few years will not be impacted.

In my opinion the changes are designed for the younger generation. Those with many years until retirement. The younger generation will contribute to CPP at the higher rate for many years and as a result will receive a larger benefit in retirement.

Clinton Orr B.Comm(hons.), CIM, CFP, DMS, FMA  lives in Beausejour and is a portfolio manager with National Bank Financial.

 

This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity.  As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group.