On June 20, 2016, an agreement in principle between the Federal government and eight provinces (British Columbia, Alberta, Saskatchewan, Ontario, Nova Scotia, New Brunswick, Prince Edward Island, and Newfoundland and Labrador) was announced to enhance future Canada Pension Plan (CPP) benefits.
To make the proposed changes, the Federal government needed the consent of a minimum of seven provinces representing at least two-thirds of Canada's population. With Ontario on board as part of the eight agreeing provinces, a final agreement is expected to be signed soon. (It was originally anticipated to be signed on July 15th, but the BC government asked for more time.)
Quebec which has its own version of CPP (i.e. Quebec Pension Plan – QPP) intends to announce its own QPP proposal but it has typically followed the CPP.
The expanded CPP is intended to address the concerns about the adequacy of retirement savings by Canadians and the on-going decline of Canadians covered by company pension plans.
The major changes to CPP will be as follows:
- an increase to the annual payout target from 25% to 33% of pensionable earnings;
- an increase to CPP premiums by 1 percent from 4.95 to 5.95 percent on earnings up to the yearly maximum pensionable earnings ("YMPE") limit which rate increase will be gradually phased in over a 5 year period commencing 2019 at which starting point the YMPE is projected to be $59,700;
- commencing 2024, a separate contribution rate of 4 percent will apply to both employers and employees on earnings above the prevailing YMPE limit up to a targeted "Upper Earnings Limit ('UEL") of $82,700 however to ease the transition of this second tier of CPP premiums, the UEL for the first year will be set at $74,900. When fully implemented in 2025, the 4 percent second tier levy will apply to earnings above the projected YMPE limit of $72,500 for the year and capped at $82,700; and
- a tax deduction will be permitted to both employers and employees for their second tier CPP contributions.
The changes will also apply to the business earnings of self-employed persons.
For employees who earn $54,900 (i.e. the YMPE for 2016), the changes to the CPP will increase their maximum annual pension income from $13,100 to about $17,500 in 2016 dollars. For employees at the $82,700 level, the second tier of contributions will help raise their maximum annual pension income to about $19,900 in 2016 dollars.
Because the future expansion to CPP benefits is intended to be prefunded, the amount of increase to a person's annual CPP pension will vary according to the contributions made under the new regime. To earn the maximum CPP enhancement, a person will need to contribute for 40 years at the limits set for 2025. Accordingly, the main beneficiaries of the changes to the CPP will be young Canadians.
