Media Room | Financial News | Investors Group

Proposed changes to the Canada Pension Plan – what you need to know

On June 20, 2016, Canada’s Minister of Finance Bill Morneau and most of the provincial counterparts signed an agreement in principle to amend the Canada Pension Plan (CPP), which would take effect January 1, 2019.

Bill C-26, which contains the amendments to the CPP, was introduced to Parliament on October 6, 2016.

What are the benefits and costs of the proposed amendments?

For Canadian employees, the proposed amendments mean receiving higher CPP benefits when they retire, compared to the benefits they would receive under the current CPP model.

Currently, the CPP retirement benefit is 25% of average adjusted earnings. With the proposed amendment, this would increase to 33%, which will be phased-in starting in 2019. Only Canadians who pay into the CPP for 40 years after 2018 will benefit from the full increase.

These increases in benefits will mean increases in contributions from Canadian employees, employers, and by self-employed persons. However, these cost increases will be phased-in over time as well - starting in 2019 and being fully implemented by 2024.

How do the proposed amendments compare to the current CPP model?

  Current Proposed

Retirement benefit formula

An individual earns a retirement benefit equal to 25% of average adjusted pensionable earnings, to a maximum of 25% of the average year’s maximum pensionable earnings (YMPE) at retirement.
The maximum CPP retirement benefit for 2016 is equal to 25% x $52,440, which is $13,110 ($1,092.50 monthly benefit).

The retirement benefit is to be increased from 25% of average adjusted earnings to 33% of average adjusted earnings. The increases will be phased-in over time. 

Pensionable earnings

The CPP retirement benefit is based on earnings between $3,500 and the YMPE, which is $54,900 in 2016.

There will be a new “upper earnings limit” upon which benefits and contributions will be based. This upper limit will be equal to the YMPE until 2023, and then in 2024 the upper limit will be an amount equal to 107% of the YMPE for 2024. By 2025 the upper earnings limit will be equal to 114% of the current YMPE.

Contribution rates (employees)

An employee contributes 4.95% of annual earnings between $3,500 and the YMPE, which is currently $54,900. The employer pays a matching amount.

Starting in 2019, there will be a phased-in increase of 1.0 % in the employee and the employer contribution rates, so that by 2023 the employee contribution percentage will be 5.95% of earnings between $3,500 and the YMPE. The employer will pay a matching amount.
Starting in 2024, the employee and employer will each contribute 4.0% of earnings above the YMPE up to the new upper earnings limit.

Contribution rates (self-employed persons)

A self-employed person contributes 9.90% of annual earnings between $3,500 and the YMPE.

Starting in 2019, there will be a phased-in increase of 2.0 % in the self-employed contribution rate, so that by 2023 the contribution percentage will be 11.90% of earnings between $3,500 and the YMPE. Starting in 2024, a self-employed person will contribute 8.0% of earnings above the YMPE to the new upper earnings limit.

Some hard numbers

As mentioned earlier, the benefit percentage under the proposed enhancement would increase from 25% to 33% of average adjusted pensionable earnings.

The maximum benefit amount will also increase with the introduction of the new upper earnings limit.  Starting in 2025, that new upper earnings limit is projected to be $82,700.

Under the enhanced CPP, if the employee’s earnings are at or above the projected 2024 upper earnings limit of $74,900, then the employee contributions for 2024 will be a total of $4,055.

If the employee’s earnings for 2025 are at or above the projected upper earnings limit of $82,700, then the employee contributions for 2025 will be a total of $4,513. 

However, most individuals will not receive the full increase in benefits related to these enhancements.

Following are examples of increased CPP benefit levels for persons of varying ages and incomes. These benefit estimates assume that the CPP payments start at age 65, and that salary increases at 3% per annum.

Age in 2016 Salary in 2016 Annual CPP
benefit at age 65
(current CPP)
Annual CPP
benefit at age 65
(enhanced  CPP)
Annual benefit increase through the enhancement

20

$20,000

$17,844

$23,544

$5,700

$25,000

$22,296

$29,436

$7,140

$30,000

$26,760

$35,316

$8,556

25

$25,000

$19,236

$25,080

$5,844

$30,000

$23,076

$30,096

$7,020

$35,000

$26,928

$35,112

$8,184

30

$25,000

$16,596

$20,976

$4,380

$35,000

$23,232

$29,364

$6,132

$40,000

$26,544

$33,552

$7,008

40

$30,000

$14,820

$17,544

$2,724

$40,000

$19,752

$23,888

$3,636

$50,000

$24,696

$29,232

$4,536

50

$35,000

$12,864

$14,196

$1,332

$45,000

$16,536

$18,252

$1,716

$55,000

$20,148

$22,260

$2,112

60

$45,000

$12,300

$12,480

$180

$55,000

$15,000

$15,216

$216

$65,000

$15,000

$15,216

$216

Source: George and Bell Consulting Inc.

What does this mean for your personal retirement savings?

Although the increase in average adjusted earnings from 25% to 33% would result in larger CPP retirement benefits, for most individuals, the CPP retirement benefit will not replace a significant portion of a person’s pre-retirement income. It’s important to still have a retirement plan in place, as this change to the CPP does not negate the need for personal retirement savings through other means. Speak with an Investors Group Consultant today if you have questions about how much you might need in retirement, and how to make the most of what you have.  

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.