Question. I’ve heard that the CPP is changing. Is it? To be honest, I don’t really understand the CPP, or the change. But I hear some people saying it’s good, and others saying it’s bad. Can you tell me more about the changes and how they might affect me?

Answer. Yes, as of January 2019, the Canada Pension Plan (CPP) is being enhanced, gradually, over the next 5 years. However, this isn’t the only change to the CPP in recent years. In 2012, the CPP was also expanded to include the Post Retirement Benefit (PRB). Both changes have essentially the same end goal – to increase benefits in retirement. Let’s take a closer look.

CPP 101 – The Basics

In Canada, we have several government operated retirement income programs – Canada Pension Plan (CPP) and Old Age Security (OAS) are the most common.

CPP is a contributory program. Once you reach age 18, you are required to contribute to the CPP if you are employed and make over $3,500 annually. The $3,500 threshold is called the YBE – Year’s Basic Exemption. The amount you receive as a CPP pension, in retirement, is based entirely on how much you’ve contributed during your working years.

As an aside, note that this is entirely different than the way OAS works. OAS – Old Age Security, is a non-contributory program, and the amount you receive as a pension in retirement is based only on how many years you’ve lived in Canada. It has nothing to do whether or not you worked, and you do not contribute to OAS, as it is funded from general tax revenues.

Back to the CPP. So how much can you expect to receive as a CPP pension in retirement? In short, not much. According to the Government of Canada, the maximum CPP payment (at age 65) is currently $1,154 per month. However, most people do not receive the maximum. Actually, most people don’t receive anywhere close to the maximum. As of October 2018, the average CPP monthly payment is $664. That’s $7,968 per year – hardly the cornerstone of your retirement income.

Keep those two key points in mind for your overall retirement income planning: First, don’t assume you’ll get the maximum CPP, and second, at an average of less than $8,000 per year, don’t rely on the CPP to be a meaningful source of retirement income.

So what has changed?

Increased Contribution Rates

The most recent change to the CPP is the amount you are required to contribute. Previously, this was 4.95% of your salary, up to a specified maximum. Currently at $57,400, that maximum changes annually, and is known as the YMPE – Yearly Maximum Pensionable Earnings. In other words, CPP contributions are not required on the portion of your income that exceeds this amount.

However, the contribution rates are increasing, from 4.95% to 5.95%. This is a gradual increase, phased in over the next five years, from 2019 to 2023. The new contribution rate is now 5.10% in 2019. Note that this is the employee’s contribution to CPP. Your employer is also required to contribute the same amount. And for those who are self-employed, you have to contribute both the employee and the employer portion, which is therefore currently a total of 10.20%.

What will you get in return for higher contributions? A higher pension in retirement. How much higher is again impossible to state, as the amount each individual receives is dependent on how much was contributed during working years.

Example 1.

Jack is a cook at a restaurant called Capital Café. He has an annual salary of $48,000 this year. Recall that no CPP contributions are levied on the first $3,500 of Jack’s income. Therefore, Jack is required to make CPP contributions on $44,500. At a contribution rate of 5.10%, Jack will contribute $2,269.50 to the CPP this year. His employer, Capital Café, will contribute the same amount on his behalf.

Example 2.

Jane is a self-employed freelance writer. She will have an annual income of $75,000 this year. Like Jack, Jane pays no CPP contributions on the first $3,500 of her income. But since Jane is self-employed, she has to contribute both the employer and employee portion to CPP. Recall that the YMPE for this year is $57,400. Therefore, Jane’s CPP contributions are on the portion of her income between $3,500 and $57,400. At a contribution rate of 10.20%, Jane will contribute $5,497.80 to the CPP this year.

PRB – Post Retirement Benefit

Although it was introduced in 2012, the Post Retirement Benefit (PRB) is still a mystery to many. Most Canadians have either never heard of it, or have heard of it, but don’t understand it.

Although the “normal” start date for receiving CPP benefits is age 65, you can elect to start receiving benefits at any time between age 60 and age 70. If you start before age 65, your benefits are reduced, and if you start after, they are increased.

Before the PRB was introduced, anyone who was collecting CPP retirement benefits, and returned to work, would no longer be required to contribute to CPP. However, since 2012, the rules have changed. If you’re collecting CPP benefits and return to work (or continue to work):

• If you’re between 60 – 64 inclusive, you must contribute to the PRB;
• If you’re between 65 – 69 inclusive, you can choose whether or not to contribute to the PRB.
  Once you reach age 70, PRB contributions are no longer possible.

The central point of the PRB is to increase your CPP pension benefit in retirement. If you contribute toward post-retirement benefits (PRB), you will increase your retirement income. However, even supplemented by the PRB, the CPP retirement pension is designed to replace only about 25% of the average person’s employment earnings (up to a maximum), and is not intended to be the sole source of retirement income.

Bottom Line

The Canada Pension Plan is a complex program with many different features and benefits. In this post, we have only scratched the surface. Other key CPP features and benefits include items such as benefit sharing between spouses or common law partners, and the decision on when you should start receiving benefits, which can be anywhere between age 60 and 70.

If you’re interested in learning more about the Canada Pension Plan, or would like to have a discussion about your retirement plans, just contact us.