Changes aimed at addressing concerns over lack of savings and decreasing number of defined benefit pension plans
Concerns at the decreasing number of defined benefit pension plans prompted changes to the CPP, which continue to be phased in this year.
Craig Hughes, director of tax and estate planning at IG Wealth Management, urged advisors – and every resident – to be aware of the changes to the national pension plan.
He added that the enhancements are designed to add a safety net and address worries at the lack of guaranteed income streams, people’s overexposure to the market and individuals’ lack of savings.
He said: “They want to make sure that, from a Government standpoint, they're giving people a core amount of guaranteed income. So they've enhanced the Canada Pension Plan in order to boost the amounts that Canadians are going to receive in retirement.”
This will be funded by an increase in people’s contribution rate, to be completely phased in by 2023. This used to be 4.95% on the employee, which the employer would match, but is gradually being increased to 5.95%.
Starting immediately from when they get the next paycheck, this has now jumped to 5.25%, which represents the next level of phasing.
Hughes added: “It’s a little more than what they paid last year, which is going to decrease people’s take-home pay a little bit. They’re going to see a bit more deducted at source, which may come as a little bit of a surprise.”
On top of this, when we get to 2024, the Government will introduce a higher threshold to the Year’s Maximum Pensionable Earnings (YMPE) – the approximation of the average wage in Canada, which this year is $58,700.
This upper limit will be increased, so that by 2025 it will fully phased in and will be 14% more, meaning the amount from which CPP collections will be made will be increased.
Hughes explained: “Basically, where we are right now is you contribute amounts between $3,500 and the YMPE threshold. They’re increasing the percentage, as I mentioned, and they are also increasing that upper limit as well
“The idea is that the CPP is supposed to replace 25% of your career earnings, up to that YMPE. The end result [of these changes] is that it wants to give you a third of your earnings all the way up to this higher limit.”
The changes benefit younger people more because it’s phased in. If somebody is 55, they’re not going to get the full benefit of this increased contribution percentage and payout amount. But over a 40-year-period, for young Canadians in particular, they're going to start to see the full benefit and the end result, according to the government finances, is that you get about 50% more when you take in the combination of the higher payout percentage plus the higher threshold.”
Other changes this year include those made to the survivor benefit when a spouse, who has been paying into the CPP, dies. If this happened when the survivor was between 35 and 45 years old, there used to be a 10% reduction for each year to the point where if you were under 35 you wouldn’t get any survivor benefit. This has been eliminated so there could be individuals outside that age range who might now be entitled to a CPP survivor pension.
The final significant change is regarding the option to defer the CPP up to the age of 70. However, there was previously no auto-enrolment program. So if somebody was 75 and hadn’t enrolled, they didn’t get their money. An auto-enrolment program will now ensure they get their payments regardless.