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10/31/2016

CPP contributions and benefits set to increas​​e

 

The Government of Canada is proceeding with legislation to increase CPP contributions and benefits. This comes after British Columbia confirmed its support for the changes on October 3, 2016 that had previously been agreed in principle. All nine CPP participating provinces have now confirmed their support for the agreement concluded on June 20, 2016.

 
The increases will occur in two phases:
 
  • The contribution rate up to the CPP yearly maximum pensionable earnings (YMPE) threshold, currently $54,900, will increase by 1% each side between 2019 and 2023 from 4.95% to 5.95% matched.

  • ​​The second phase will involve further contributions at a different rate to a higher level. By 2025, contributions of 4% matched will be required on earnings from the YMPE to 114% of the YMPE.​


At this point, the YMPE is projected to rise to about $72,543 by 2025, with the result that the second tier of contributions will apply to earnings between $72,543 and $82,700. Both these amounts will then increase over time as the YMPE is adjusted to match increases in Canada’s average industrial wage. The second tier of contributions will be fully deductible for employees, rather than producing a non-refundable tax credit like basic CPP contributions up to the YMPE.


The table below illustrates the phase-in of additional contributions up to the YMPE between 2019 and 2023, and the increase of the limit for second tier contributions in 2024 and 2025. The table shows the phase-in of total contributions by employers and employees.
​​

​​Changes to the Income Tax Act have already been introduced to permit the deduction of the second tier of contributions. Legislation to implement the remaining changes was introduced on October 6, 2016. At this point, it appears there will be no opt-out on second tier contributions for employers already providing an equivalent retirement benefit.


The chart below shows the total cost of the contribution increase for employees and employers between 2019 and 2025 up to the YMPE, and for the second tier between $72,500 and $82,700. The total estimate is $480 per year by 2025, or $240 matched.

Year-over-year-increase.jpg

An important point in the government’s most recent announcement is that, unlike the original CPP which was subsidized starting in 1966 for retirees, these enhancements will be fully funded. This means that increases to benefits will be based solely on additional contributions. As a result, the full impact of the enhancements will not be felt until participants have a full contribution history at the new rates.​

Illustration-of-annual-enhanced-CPP-benefits.jpg

This means that the full value of the enhancement will not be received until participants start their CPP pensions in 2065 at age 65. By this date, a full CPP pension will go up by about $4,000, from $12,000 to $16,000 per year, assuming annual earnings of $50,000, all in 2016 dollars.

Once the legislation passes final reading and becomes law, CSS will provide a final update. We will then begin the process of modelling the impact of the new contribution rates on our employer and employee members. We will also try to model the impact of the additional projected CPP benefits on the Plan’s target income replacement ratio.​