A surprising number of Canadians don’t have enough savings to ensure a comfortable retirement. In fact, the federal government estimates that a quarter of families are at risk of not having enough savings to maintain their current standard of living in retirement.
To help retirees make ends meet, the Canadian and Quebec governments decided a few years ago to enhance their pension plans. The changes will mean larger retirement pensions as well as improved disability and survivor benefits. However, those benefits come at a cost—higher mandatory contributions for workers and employers. So, Canadian workers will be getting higher CPP and QPP pensions in the future but in exchange will have to contribute more during their working years.
How big a retirement pension you get from CPP or QPP depends on how much you contributed, over how many years and how old you are when you retire. The standard retirement age is 65, but as I explain in this video, you can collect a reduced pension as early as age 60 or get an enhanced pension by waiting beyond age 65, up until the age of 70.
Until 2019, the CPP and QPP retirement pensions were designed to replace 25 per cent of a person’s earnings, up to limit known as the yearly maximum pensionable earnings (YMPE). The YMPE is simply the average salary earned in Canada each year. In 2021, that limit is $61,600. Under the new plan, CPP and QPP pensions will gradually be increased to replace a maximum of 33% of your average work earnings, up to the YMPE. What’s more, the YMPE will effectively be increased by 14% when the new plan is full implemented by 2025. So, the new plans will cover a higher percentage of a larger salary when all said and done.
Source: Institut Québécois de planification financièreThat’s great news for young people who are just starting out in their careers, but it won’t make much difference if you are near retirement today. That’s because the enhanced benefits are being phased in gradually over a 45-year period.
People retiring in 2065 or later will see an increase in their CPP or QPP retirement pension of up to 50% over what they would have got before the enhancements. In other words, you have to put in the years of higher contributions to see the benefits when you retire.
On the other side of the ledger, contributions are increasing in two phases to help pay for these enhanced benefits. The way CPP and QPP work is that employees and employers make equal annual contributions to the plans. Self-employed workers pay both the employee and employer contributions.
Phase 1 of the contribution increases began on January 1, 2019. Contribution rates are rising over five years to 2023. From a base of 4.95% in 2018, the employee contribution rate will increase gradually to 5.95% by 2023, on earnings up to the YMPE. QPP contribution rates, which were already higher before the new plan started, are increasing from 5.4% in 2018 to 6.4% by 2023. The second phase will begin in 2024. The government will increase the YMPE in 2024 and 2025 by a cumulative 14%. Using the 2021 YMPE, that means that employees and employers will have to make CPP or QPP contributions on roughly $8,600 more salary, assuming they earn at least $70,000 a year.
However, the contribution rate for those extra earnings between the original YMPE and the new higher limit will only be 4.0% each for employees and employers. For those earning enough to have to make those contributions, they’ll get a bigger bang for their buck since the contribution rate is lower than on the base YMPE. The effect of raising this earnings ceiling will be to increase the contributions for higher income earners. At the same time, higher income earners will be eligible for a larger retirement pension because it will be based on a larger portion of their income.
What will the changes mean if you are already collecting CPP or QPP?
Well, if you retired before 2019, they will make no difference because you did not contribute to the new plan and therefore will not get the enhanced benefits.
It’s a different story if you are collecting CPP or QPP and still working. In this case, you and your employer are required to continue contributing until you turn 65. If you are still working after 65, you can opt to continue making contributions until age 70. These contribution years will be under the new plan and will result in a somewhat higher pension than you would have been entitled to under the old plan. These will be valuable contributions to make since they’re made very close to the time when you’ll be receiving the benefit of them. In general, it makes a lot of sense to keep contributing to the plan for as long as you can.
For most Canadians, their CPP or QPP pension will form a solid foundation for their retirement planning. The plans are well-financed and indexed to inflation. The changes to the plans will mean higher contributions in the short-term, but a more secure retirement in the decades ahead.