The expansion of the Canada pension Plan (CPP) program, which begins to take effect in January, will have a significant impact on retirement planning. Although contribution rates will rise gradually over the next several years, the effect on Canada’s retirement regime will be far-reaching in the longer term.
“When the changes are fully effected, [the increase in CPP benefits] is going to be very significant for a lot of Canadians,” says Todd Sigurdson, director, tax and estate planning, with Investors Group Inc. in Winnipeg.
Adds Debbie Pearl-Weinberg, executive director, tax and estate planning, in Canadian Imperial Bank of Commerce’s financial planning and advice group in Toronto: “There will be new projections [needed] when people are preparing a retirement plan.”
The federal government announced the expansion of the CPP program in June 2016 that means CPP benefits ultimately will cover one-third of Canadians’ annual eligible pensionable earnings, up from 25% under the current plan. The move was made to address concerns that too many Canadians are unprepared financially for retirement, particularly individuals without access to a workplace pension plan.
A report published in June by the Canadian Institute of Actuaries (CIA) regarding its study of the CPP changes states: “The CPP enhancements should help Canadians maintain or improve their working-life living standards after retirement. This is particularly true for middle-earning Canadians without significant employer registered pension-plan participation during their working lives.”
However, the changes also are likely to have knock-on effects on Canada’s retirement system, overall. These may include Canadians choosing to save less on their own for retirement, including by lowering their RRSP contributions, and employers electing to reduce workplace pension benefits, Sigurdson says.
“It’s a fairly safe bet that you are going to see employers make adjustments to their pension plans,” Sigurdson adds, “because their [matching CPP] contributions are going to go up significantly because of these enhancements to the CPP.”
Currently, working Canadians over the age of 18 make CPP (or Quebec Pension Plan) contributions of 4.95% of their earnings between a basic fixed exemption amount of $3,500 and a year’s maximum pensionable earnings (YMPE) threshold ($55,900 in 2018), which is indexed to inflation annually. Employers contribute a matching 4.95%. Self-employed individuals contribute both the employer and employee amounts at a rate of 9.9%.
Under the expanded CPP, contribution rates on earnings up to the YMPE threshold will be increased annually, on an incremental basis, between 2019 and 2023 – ultimately reaching 5.95% (or 11.9% for combined employee and employer contributions). This one percentage point increase in the contribution rates, for both employee and employer, is known as the first additional contribution.
A second increase of four percentage points in the contribution rate will occur in 2024 for both employees and employers on amounts between the YMPE and a new, higher amount to be known as the year’s additional maximum pensionable earnings (YAMPE). The YAMPE will be set at 7% above the YMPE in 2024, then 14% above the YMPE in 2025 and thereafter. The federal government estimates that in 2025, the YMPE will be $72,500 and the YAMPE will be $82,700.
As a result of the changes, the additional contribution amounts will be tax- deductible for employees; the current base contributions of 4.95% up to the YMPE threshold will continue to be eligible for non-refundable tax credits. The additional contribution amounts will be held in the CPP in a separate account, but still form part of the CPP.
For Canadians who are retired already, the changes won’t alter their CPP benefits. People still in their working years will see partial benefit from the changes, depending on how many years those individuals contribute to the expanded CPP. Only Canadians who are set to begin their working lives in the next several years will get the full benefit of the enhanced CPP decades from now.
In the short term, your clients who are most likely to feel the effect of the changes will be self-employed individuals who have to pay both the employee and employer CPP contributions, and small-business clients who will see their labour costs rise.
“We expect to receive more questions from clients who are business owners who are going to be making enhanced contributions beginning [in January],” Sigurdson says.
Eventually, the enhancements will affect the way all Canadians plan for retirement. For example, higher CPP benefits in retirement will mean that some seniors will lose full access, via clawbacks, to government programs such as old-age security and the guaranteed income supplement.
There also is a risk, according to the CIA’s report, that some Canadians – particularly those with access to generous workplace pensions – will be “overprepared” for retirement under the new program, thereby “unnecessarily reducing their living standards during their working lives because of the new contributions.”