Financial advisory from Demo.
TD Wealth Management
Pension Reform: The CPP is Set to Change
During the summer, nine provinces agreed to make enhancements to the Canada Pension Plan (CPP). This is intended to address the shortfall in middle-income retirement planning. As the number of company-sponsored defined-benefit pension plans declines, supporters of these changes believe that this will help many working Canadians to save for retirement. (Note: Quebec did not join in these reforms and intends to make changes to its own provincial pension regime.)
Remember that in order to collect C PP benefits, you generally need to contribute to the CPP during your employment years. The CPP is fully funded by two groups: the employer and the employee. Funds are managed by a group of professionals under the CPP Investment Board. As such, these new reforms will not assist those who do not contribute to the CPP during their working years.
Here are the proposed CPP changes, expected to begin in 2019:
- Higher payouts – The annual payout target will increase by one-quarter to one-third annually. For a worker earning $54,900 per year, the 2016 maximum annual pension payment is $13,110 at the age of 65. This is expected to rise to around $17,500 in today’s dollars.
- Greater contribution rate – CPP contributions from both workers and employers will gradually increase by 1 percentage point, to 5.95 percent of wages. This will be phased in between 2019 and 2023.
- Increased income coverage – The maximum amount of earnings subject to CPP contribution will increase. Currently the year’s maximum pensionable earnings is $54,900. This is expected to rise to $82,700 (phased in) by the year 2025. A lower contribution rate, expected to be 4 percent, has been proposed for earnings between $54,900 and $82,700.
- Tax deduction – A new tax deduction has been proposed for the portion of additional worker contributions as a result of these changes to help ease the potential financial burden.
Who will benefit? Younger employees are expected to benefit the most from these changes. In order to earn the full CPP amount proposed, a person will generally need to fully contribute for around 40 years once the program is fully phased in by 2025.