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6/24/2016

CPP expansion - what it means for you​​​​​​


On June 20, nine of Canada’s 11 finance ministers agreed to expand the Canada Pension Plan (CPP).

The expansion is designed to improve retirement security for all working Canadians by increasing CPP’s income replacement target, while adding a second tier of contributions for middle-income earners. Research indicates that many middle-income earners have lost access to an employment pension plan but have trouble saving on their own. According to Mercer, only one in four Canadians belong to a pension plan.

The new CPP contribution regime is expected to be fully operational seven years after the first increase in January 2019.

Initial information released this week indicates the following changes:​


  • Increased income replacement - The expected income replacement rate for CPP at retirement, assuming a full contribution history, will rise from 25% to 33.3% of covered earnings. This would increase the maximum annual Canada Pension, currently at $13,110, to $17,478 for a worker earning about $55,000 a year.

  • ​Increased contribution rates - To pay for the higher benefit level, CPP contribution rates will rise. The current matched CPP contribution rate is 4.95% on employment income between $3,500 and $54,900. From 2019 to 2023, the matched contribution rate will gradually increase to 5.95% - a 1% increase for both employers and employees.

  • Increased covered earnings - The annual earnings maximum for CPP contributions will increase from $54,900 to $82,700 by 2025.

  • Contribution rate on additional covered earnings - The expected contribution rate on the additional earnings between $54,900 and $82,700 is expected to be 4% for both employers and employees.

  • ​Tax deduction introduced - To help offset the cost of the expanded program, a tax deduction – rather than a tax credit – will be provided for the contributions on covered earnings above the old maximum.

  • Enhanced Working Income Tax Benefit - The federal Working Income Tax Benefit will increase to counterbalance the impact of increased contributions on low-income earners.

  • ​Phased in benefit increases - Full benefits under the expanded CPP will not be available until 2065. Until that date, retirees will receive partial increases based on the length of time they contributed at the old rate and at the new rates. Younger workers who contributed more and longer at the new rates would therefore reap the most benefit, while older workers would see little difference and current retirees would receive no increase.

Higher CPP contributions for both employers and employees could impact the design of employment pension plans like the CSS Pension Plan. As reported last year, declining investment returns are impacting the Plan’s income replacement target. Because the Plan’s target includes CPP, the expansion announced this week may partially address this issue.

Changes to the CPP require the agreement of the government of Canada and at least seven provinces representing at least two thirds of Canada’s population. Quebec, who has a separate but similar Quebec Pension Plan, and Manitoba, with a newly-elected Conservative government, did not sign the agreement. Those participating are expected to sign a formal agreement by July 15.

The CSS Pension Plan will provide further updates as we learn more about the changes.​