Are you looking for ways to increase your retirement income and enjoy a more comfortable lifestyle? If so, you might be interested in the recent changes to the Canada Pension Plan (CPP) that will benefit millions of Canadians in the future. 🙌
The CPP is a mandatory pension plan that provides a basic level of income replacement for workers who retire, become disabled, or die. It is funded by contributions from employees, employers, and self-employed individuals. The CPP covers almost all workers in Canada, except those in Quebec who have their own plan, the Quebec Pension Plan (QPP).
In 2019, the CPP started to undergo a gradual enhancement that will increase the amount of benefits for today’s workers and their families. The enhancement will also raise the maximum earnings limit that is protected by the CPP. 💰
The CPP enhancement is designed to help Canadians save more for retirement and reduce the risk of not having enough income in their golden years. It is especially beneficial for those who do not have a workplace pension plan or other sources of retirement savings.
In this article, we will explain how the CPP enhancement works, how it will affect your contributions and benefits, and how you can plan ahead for your retirement. Let’s dive in! 🚀
What is the CPP enhancement and why is it needed?
The CPP enhancement is a result of an agreement reached by the federal, provincial, and territorial governments in 2016 to improve the retirement security of Canadians. The enhancement consists of two additional components that act as a top-up to the existing, or base, CPP. These components are:
- The first additional component, which was phased in between 2019 and 2023, and
- The second additional component, which will be phased in between 2024 and 2025
The CPP enhancement aims to address two main challenges that many Canadians face when saving for retirement:
- The decline of workplace pension plans, especially defined benefit plans that guarantee a certain amount of income for life
- The low level of personal savings, partly due to the high cost of living, debt, and competing financial priorities
According to a study by the Fraser Institute, only 37% of Canadian workers had a workplace pension plan in 2018, down from 46% in 1977¹. Moreover, only 10% of private sector workers had a defined benefit plan, compared to 82% of public sector workers¹.
Without a workplace pension plan, Canadians have to rely on their personal savings and investments, such as registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), and other assets, to supplement their CPP and Old Age Security (OAS) benefits.
However, many Canadians are not saving enough for retirement, either because they do not have enough income, they have other financial obligations, or they lack financial literacy. According to Statistics Canada, the median value of RRSPs for Canadians aged 55 to 64 was only $101,000 in 2019². This amount is far from enough to provide a decent income for a typical retirement period of 20 to 30 years.
The CPP enhancement is meant to help fill the gap between the income that Canadians need and the income that they have in retirement. By increasing the CPP benefits and contributions, the enhancement will encourage Canadians to save more and provide them with a higher and more secure income in retirement.
How will the CPP enhancement affect your contributions?
The CPP enhancement will affect how much you and your employer (or you alone, if you are self-employed) contribute to the CPP. The contribution rate for the base CPP will remain the same at 9.9%, split equally between you and your employer. However, the contribution rate for the additional components will be higher and will increase gradually over the next few years.
The table below shows the contribution rates for the base and additional components of the CPP for 2019 to 2025³:
| Year | Base CPP rate | First additional rate | Second additional rate | Total CPP rate |
| 2019 | 9.9% | 0.3% | 0% | 10.2% |
| 2020 | 9.9% | 0.6% | 0% | 10.5% |
| 2021 | 9.9% | 0.9% | 0% | 10.8% |
| 2022 | 9.9% | 1.2% | 0% | 11.1% |
| 2023 | 9.9% | 1.5% | 0% | 11.4% |
| 2024 | 9.9% | 1.5% | 0.5% | 11.9% |
| 2025 | 9.9% | 1.5% | 1% | 12.4% |
As you can see, the total CPP contribution rate will increase from 10.2% in 2019 to 12.4% in 2025. This means that you and your employer will each pay 6.2% of your pensionable earnings to the CPP in 2025, up from 5.1% in 2019. If you are self-employed, you will pay the full 12.4% in 2025, up from 10.2% in 2019.
The CPP enhancement will also increase the maximum earnings limit that is protected by the CPP. This limit, also known as the Year’s Maximum Pensionable Earnings (YMPE), is the maximum amount of earnings that are subject to CPP contributions and benefits. The YMPE is adjusted annually based on the average wage growth in Canada.
For the base CPP, the YMPE will continue to increase as usual. For the additional components, the YMPE will increase by 14% between 2024 and 2025. This means that there will be a higher earnings limit for the additional components than for the base CPP. The table below shows the projected YMPE for the base and additional components of the CPP for 2019 to 2025³:
| Year | Base CPP YMPE | Additional CPP YMPE |
| 2019 | $57,400 | $57,400 |
| 2020 | $58,700 | $58,700 |
| 2021 | $61,600 | $61,600 |
| 2022 | $64,900 | $64,900 |
| 2023 | $68,300 | $68,300 |
| 2024 | $71,900 | $82,700 |
| 2025 | $75,600 | $89,400 |
As you can see, the additional CPP YMPE will be higher than the base CPP YMPE starting from 2024. This means that you will contribute more to the CPP if your earnings are above the base CPP YMPE, up to the additional CPP YMPE.
To illustrate how the CPP enhancement will affect your contributions, let’s look at an example. Suppose you are an employee who earns $80,000 per year. The table below shows how much you and your employer will contribute to the CPP for 2019 to 2025:
| Year | Base CPP contribution | First additional contribution | Second additional contribution | Total CPP contribution |
| 2019 | $2,748.90 | $82.20 | $0 | $2,831.10 |
| 2020 | $2,796.40 | $164.40 | $0 | $2,960.80 |
| 2021 | $2,928.60 | $246.60 | $0 | $3,175.20 |
| 2022 | $3,089.10 | $328.80 | $0 | $3,417.90 |
| 2023 | $3,254.70 | $411.00 | $0 | $3,665.70 |
| 2024 | $3,424.50 | $411.00 | $51.40 | $3,886.90 |
| 2025 | $3,598.40 | $411.00 | $102.80 | $4,112.20 |
As you can see, your total CPP contribution will increase from $2,831.10 in 2019 to $4,112.20 in 2025, an increase of 45%. Your employer will match your contribution, so the total amount paid to the CPP will be $8,224.40 in 2025, up from $5,662.20 in 2019.
Note that these numbers are based on the projected YMPE and contribution rates, which may change in the future. You can use the CPP enhancement calculator to estimate your CPP contributions and benefits based on your current and future earnings.
How will the CPP enhancement affect your benefits?
The CPP enhancement will affect how much you will receive from the CPP when you retire, become disabled, or die. The amount of CPP benefits you will receive depends on several factors, such as:
- How much and how long you have contributed to the CPP
- The age at which you start receiving CPP benefits
- The type of CPP benefit you are eligible for (e.g. retirement, disability, survivor, etc.)
- The average wage growth and inflation in Canada
The CPP enhancement will increase the amount of CPP benefits for those who contribute to the additional components. The increase will be proportional to the amount and duration of your contributions to the additional components. The longer and more you contribute, the higher your benefits will be.
The table below shows the projected percentage increase in CPP benefits for different cohorts of workers who contribute to the additional components for various periods of time:
| Years of contribution to the additional components | Increase in CPP benefits for workers born in: |
| 10 | 1975: 1.5% |
| 1990: 2.7% | |
| 2005: 3.8% | |
| 20 | 1975: 3.2% |
| 1990: 5.8% | |
| 2005: 8.5% | |
| 30 | 1975: 5.1% |
| 1990: 9.2% | |
| 2005: 13.6% | |
| 40 | 1975: 7.2% |
| 1990: 12.7% | |
| 2005: 18.9% | |
| 45 | 1975: 8.5% |
| 1990: 15.0% | |
| 2005: 22.5% |
As you can see, the younger you are, the more you will benefit from the CPP enhancement. For example, if you contribute to the additional components for 40 years, your CPP benefits will increase by 7.2% if you were born in 1975, by 12.7% if you were born in 1990, and by 18.9% if you were born in 2005.
The CPP enhancement will also increase the maximum CPP benefit that you can receive. The maximum CPP benefit is the highest amount of CPP benefit that you can receive if you contribute the maximum amount to the CPP for at least 39 years and start receiving CPP benefits at age 65.
The table below shows the projected maximum CPP benefit for the base and additional components of the CPP for 2019 to 2025:
| Year | Base CPP maximum benefit | Additional CPP maximum benefit | Total CPP maximum benefit |
| 2019 | $13,855 | $28 | $13,883 |
| 2020 | $14,109 | $56 | $14,165 |
| 2021 | $14,445 | $85 | $14,530 |
| 2022 | $14,788 | $114 | $14,902 |
| 2023 | $15,138 | $143 | $15,281 |
| 2024 | $15,497 | $172 | $15,669 |
| 2025 | $15,864 | $201 | $16,065 |
As you can see, the total CPP maximum benefit will increase from $13,883 in 2019 to $16,065 in 2025, an increase of 15.7%. Note that these numbers are based on the projected YMPE and benefit rates, which may change in the future.
How GIS Benefits Low-Income Canadian Seniors: A Guide to the Guaranteed Income Supplement
How can you plan ahead for your retirement?
The CPP enhancement is a positive change that will help you save more for your retirement and enjoy a higher and more secure income. However, the CPP enhancement alone is not enough to ensure your retirement security. You still need to plan ahead and take other steps to achieve your retirement goals.
Here are some tips to help you plan ahead for your retirement:
- Estimate your retirement income and expenses. You can use the [Canadian Retirement Income Calculator] to get an estimate of your CPP, OAS, and other sources of income in retirement. You can also use the [CPP enhancement calculator] to see how the CPP enhancement will affect your CPP contributions and benefits. You should also consider your expected expenses in retirement, such as housing, health care, travel, hobbies, etc.
- Set a retirement budget and savings goal. Based on your estimated income and expenses, you can set a realistic retirement budget and savings goal. You should aim to save enough to cover the gap between your income and expenses, as well as to account for inflation, taxes, and unexpected events. A general rule of thumb is to save at least 10% of your income for retirement, but you may need to save more or less depending on your situation.
- Contribute to your RRSP and TFSA. Your RRSP and TFSA are powerful tools to help you save for retirement. Your RRSP allows you to defer taxes on your contributions and earnings until you withdraw them in retirement, while your TFSA allows you to earn tax-free income and withdraw it anytime without affecting your eligibility for government benefits. You should maximize your contributions to both accounts, if possible, and invest them wisely according to your risk tolerance and time horizon.
- Consider other sources of retirement income. Besides the CPP, OAS, RRSP, and TFSA, you may have other sources of retirement income, such as a workplace pension plan, an annuity, a reverse mortgage, or rental income. You should review your options and see how they fit into your retirement plan. You should also be aware of the rules and risks associated with each source of income, such as fees, taxes, penalties, and market fluctuations.
- Review and adjust your plan regularly. Your retirement plan is not a one-time thing. You should review and adjust your plan regularly, at least once a year, to reflect any changes in your income, expenses, goals, and circumstances. You should also monitor your investments and rebalance your portfolio as needed to maintain your desired asset allocation and risk level.
Conclusion
The CPP enhancement is a welcome change that will benefit millions of Canadians in the future. It will increase the amount of CPP benefits and contributions, as well as the maximum earnings limit that is protected by the CPP. It will help Canadians save more for retirement and reduce the risk of not having enough income in their golden years.
However, the CPP enhancement is not a magic bullet that will solve all your retirement problems. You still need to plan ahead and take other steps to achieve your retirement goals. You should estimate your retirement income and expenses, set a retirement budget and savings goal, contribute to your RRSP and TFSA, consider other sources of retirement income, and review and adjust your plan regularly.
By doing so, you can enjoy a more comfortable and secure retirement lifestyle. Remember, the sooner you start planning and saving, the better off you will be. 💯
We hope you found this article helpful and informative. If you did, please share it with your fellow Hustlers who might benefit from it. Also, don’t forget to check out our website, HustleHub, for more tips and resources on how to hustle smarter and harder. 🚀
Source: (1) Canada Pension Plan enhancement – Canada.ca. https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-enhancement.html. (2) The Canada Pension Plan enhancement – Businesses, individuals, and self …. https://www.canada.ca/en/revenue-agency/news/2023/05/the-canada-pension-plan-enhancement–businesses-individuals-and-self-employed-what-it-means-for-you.html. (3) Webinar: Canada Pension Plan Enhancement – Canada.ca. https://www.canada.ca/en/revenue-agency/news/cra-multimedia-library/businesses-video-gallery/canada-pension-plan-enhancement.html. (4) Canada Pension Plan enhancement – Canada.ca. https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-enhancement.html.Â