Retirement
The Canada Pension Plan (CPP) is a contributory pension plan administered by Service Canada, and considered one of the three pillars of the Canadian retirement system.
Enhancements to the CPP program started in 2019 and were undertaken as part of an agreement between Canada’s Finance Ministers in 2016. Research at the time indicated that 24%1 of families nearing retirement age were at risk of not having adequate income in retirement to maintain their standard of living. The enhancements are now in place as part of a long-term strategy to address these inadequacies.
Why is understanding your CPP entitlement important when planning for retirement?
For eligible pensioners, CPP provides a source of secure inflation adjusted retirement income for life. Pensioners bear no risk of market volatility on their pension income and benefits are indexed to the annual increase in the Consumer Price Index (CPI). During the 2020/2021 fiscal year, 5.5 million CPP retirement pensioners were paid a total of $40.28 billion.2
The standard age to start the pension is 65. However, you can start receiving it as early as age 60 or as late as age 70. For each month your pension is received prior to age 65, the amount you are entitled to will be decreased by 0.6% (which means a reduction of 36% if started at age 60). Your payments will be increased by 0.7% for each month your CPP retirement pension is deferred (an increase of 42% if elected at age 70).
How much will you receive? Base component versus enhanced component
The CPP program looks at earnings over your career average and is made up of two parts: the base component, which began in 1966, and the enhanced component, which serves as a top-up to the base. A further enhancement is starting in 2024, the Year’s Additional Maximum Pensionable Earnings (YAMPE). The YAMPE will be set at an amount that is 7% higher than the first earnings ceiling (the year’s maximum pensionable earnings, or YMPE), and will rise to 14% above the first earnings ceiling in 2025 and the following years.
The base component replaces up to 25% of a contributor's eligible career earnings, up to a maximum earnings ceiling amount, known as the YMPE, which is $64,900 for 2022.
With the enhancements, benefits are growing to replace up to one-third of your eligible earnings. These enhancements will only impact you if you work and contribute to the program from 2019 onward. The enhancement also applies to the CPP post-retirement benefit.
Illustration of enhancement replacement rate
Source: Government of Canada
This Government of Canada illustration of the CPP enhancement, shows that it is comprised of two components and how those components interact with the base CPP. The first component sits above the base CPP and increases the replacement rate from 25% to 33% over the same range of earnings. The second component provides 33% income replacement on earnings above the year’s maximum pensionable earnings (YMPE), up to 1.14% of the YMPE.
Workers who start paying into the program once all the enhancements are fully integrated in 2025 and onward (Canadians born 2000 and later), and pay into the enhanced program for a minimum of 40 years, will benefit the most, and see up to a 50% increase in their CPP versus pensioners receiving CPP under the current program. Here’s looking at you Gen Z!
How much will you contribute?
CPP premiums on income up to the first earnings ceiling (YMPE)
|
Year |
Contribution rate split (employee/ employer) |
Contribution rate (self-employed) |
Estimated first earnings ceiling3 |
Estimated maximum yearly contribution (employee/employer)4 |
Estimated maximum yearly contribution (self-employed)3 |
|
2022 |
5.7% |
11.4% |
$64,900 |
$3,500 |
$6,999 |
|
2023 |
5.95% |
11.9% |
$65,700 |
$3,701 |
$7,402 |
|
2024 |
5.95% |
11.9% |
$67,700 |
$3,820 |
$7,640 |
|
2025 |
5.95% |
11.9% |
$69,700 |
$3,939 |
$7,878 |
CPP premiums on income over the first ceiling (YMPE) up to the second ceiling (YAMPE)
|
Year |
Contribution rate split (employee/ employer) |
Contribution rate (self- employed) |
Estimated first earnings ceiling3 |
Estimated second earnings ceiling3 |
Estimated maximum yearly contribution (employee/ employer) |
Estimated maximum yearly contribution (self-employed) |
|
2022 |
N/A |
N/A |
$64,900 |
N/A |
N/A |
N/A |
|
2023 |
N/A |
N/A |
$65,700 |
N/A |
N/A |
N/A |
|
2024 |
4% |
8% |
$67,700 |
$72,400 |
$188 |
$376 |
|
2025 |
4% |
8% |
$69,700 |
$79,400 |
$388 |
$776 |
Let’s look at an example:
Riley earns $83,000/year in employment income in 2022. Riley can expect to pay CPP premiums of $3,500 this year because CPP is only payable on part of her income. Currently the YMPE for 2022 is $64,900, therefore, her premiums calculation is:
(YMPE - exempt earnings) * employee contribution rate = ($64,900-$3,5004) * 5.70% = $3,500.
The YAMPE discussed above is not rolling out until 2024.
Let’s explore what happens if Riley receives a raise and now earns $86,000 in 2024 when the second earnings ceiling, YAMPE, comes into effect.
Riley’s CPP premiums will now be calculated as follows:
- Premium payable on first earnings ceiling = ($67,700-$3,500)*5.95% = $3,820
- Premium payable on earning between the first and second ceilings = ($72,400-$67,700)*4.00% = $188
A+B ($3,820+$188) = $4,008 premium for 2024
Putting it all together: How will the enhancement affect your CPP benefit amount?
Maximum CPP benefit amounts increase every month as a result of the enhancement. However, you would have to contribute to the CPP for a full 40 years at the maximum level to receive the maximum benefit. As a result, most recipients are likely to get lower than the maximum amount. In fact, in 2022 the maximum monthly amount a 65-year-old could receive is $1,253.59. However, the average monthly amount paid for a new retirement pension (at age 65) as of April 2022 was $727.61.
Doug Runchey, a former specialist in the Canada Pension Plan and Old Age Security legislation, offers a detailed set of calculations on the enhancements’ impact on CPP benefits. His analysis indicates that “for each year of pensionable earnings beyond 2024, the changes mean that your maximum CPP retirement pension will be approximately 1.3% more than under the current [2018 and prior] rules.”
Let’s put this into perspective for various age groups. We leaned on financial planning software to run some calculations.5 We assumed for each age group the individual would be entitled to 85% of the “max” and start receipt of benefits at normal age, age 65. Here is what we found:
Estimated CPP entitlement at age 65 in today's dollars
Source: ATB Wealth
We can see that a 25-year-old today is anticipated to receive 35% more than a 60-year-old, despite both being entitled to 85% of the maximum at age 65. For those individuals who are in the middle of their careers, the increase will be more modest. Our 45-year-old will be paying into the enhancement over the 2019-2039 period, thereby realizing a benefit 17% higher than that of a 60-year-old.
Summary
Interestingly, subsequent wage growth in Canada has caused a deviation in actual YMPE, versus the forecast model used during the Finance Ministers Meeting in 2016. As a result, Service Canada is currently updating much of the enhancement information on its website. As values evolve in the future, particularly with the introduction of the second limit in 2024, ATB Wealth will continue to monitor the situation and provide updates.
Ensuring you understand the CPP benefits that will be available to you is an important part of planning for your future, and while retirement planning may seem complicated, an ATB Wealth advisor can ensure you are on the path to a financially sound and fulfilling life in retirement.
YMPE calculations are completed annually and are based on an average of weekly earnings recorded over the 12 months ending June 30. Values shown are those provided by CRA as of May 16, 2022,
The first $3,500 of annual earnings is exempt from contributions. For example if an employee earns $64,900/year in 2022 their CPP premium is calculated based on ($64,900-$3,500)*5.70% = $3,500
Calculations completed using Naviplan by Investcloud, planning software, which was upgraded to include enhanced CPP calculations in 2018 and uses current YMPE of $64,900. Present value calculations assume a 2.1% discount rate.
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