The Canada Pension Plan (CPP) provides a basic guaranteed monthly pension amount based on working Canadians' contributions to the plan until retirement. Anyone who makes at least one valid contribution during their lifetime is eligible to receive benefits. Quebec residents have a similar program, called the QPP, that's also changing to reflect CP changes.
The new CPP enhancement, announced in 2016, is underway in 2019. The goals of the improvement are:
Increased contributions kicked off the first phase in 2019. Increases will continue until 2025. Read on to find out how the roll-out of initial CPP enhancements could affect your income and your retirement.
The CPP is a big deal for all Canadians, even if they don't realize it. It affects them when they start their first job to their last years of retirement. The CPP investment fund manages over $300 billion and serves 20 million current and future beneficiaries (excluding residents of Quebec).
Despite its size, the CPP's ability to fund future pensions depends heavily on changes in demographics. In Canada‚ and all other industrialized nations‚ the average age of the population started increasing decades ago. At the same time, the birth rate fell to less than two children (currently 1.6).
An aging population drains more and more benefits from the CPP every year. To make matters worse, fewer births in Canada translates into fewer CPP contributors down the road. It's a double whammy with severe consequences.
To make sure the CPP doesn't run out of money, the government can either increase contributions or decrease benefits, or both. Reducing benefits isn't an option. That would go against the government's goal of reducing poverty among seniors. Also, it would be a very unpopular move for any politician who values their job.
And so, the government raises contribution rates every decade or so to offset shortfalls in contributions versus a growing number of beneficiaries. But the 2016 changes to the CPP go further than preventing the plan from temporarily running out of money. They also attempt to alleviate the gap in Canadians' retirement savings by boosting maximum benefits significantly by 2065.
The CPP is among the largest state-run pension plans on the planet but still faces considerable survival challenges every few years. In addition, Canadians don't have nearly enough saved up for retirement. Some experts, such as former Standard Life Canada CEO Joseph Iannicelli, believe workplace retirement savings plans like group RRSPs should be mandatory, even for small businesses.
Australia made radical changes to its pension laws 30 years ago. The government made retirement savings plans mandatory for companies with at least 18 employees. Moreover, the government manages or strictly controls investment choices for most retirement savings in the country. This move gives plan members access to risk-averse top-tier institutional pension management at virtually no cost.
In Canada, employer-sponsored group RRSP plans aren't mandatory. Many smaller companies don't offer retirement programs to employees. And companies that have plans may have limited investment choices and high fees.
Also, because plans are optional, people can opt out. And those who join make their own investment choices. Employees might not have to knowledge or desire to properly manage their investments. But for better or for worse, their retirement and their family's future lie in their own hands.
The short answer is "probably not." It depends on lifestyle choices and whether you have a spouse. But one thing's for sure, retirement without any savings would be a no-frills existence.
A retired couple receiving maximum benefits might have a better chance of getting by on roughly $30,000 of maximum yearly CPP and Old Age Security benefits. But that's if both individuals qualify for the maximum. However, the average CPP payment of $640 per month is nowhere near that maximum.
For someone who lives alone, retirement would be even more challenging. With a maximum of $15,000 in benefits, but similar expenses to pay, they would be at or below the poverty line. Maximum benefits will rise slowly until 2065, to reach 150% of what they are today. However, inflation over the next 45 years will eat into part of the increase.
You can call Service Canada (1-800-277-9914) if you have questions about the CPP and to get a Statement of Contributions that estimates your benefits at retirement.
Whether you're self-employed or a salaried employee, it's best to start thinking about retirement options as early as possible. Middle-class Canadian couples might plan on roughly $50-70K (including CPP) of joint income for an average retirement lifestyle. That corresponds to $350K-$1M in savings, spread over 20 or more years of retirement.
Canadians are living longer than ever, so understanding how much you need is essential. You can start by trying a retirement savings calculator. Most Canadian financial institutions have one on their website. According to Sun Life, "on average, retired Canadians are living on 62% of what they earned before leaving the workforce." If a couple earned $100,000 of gross income before retirement, 62% would be right in the middle of that range, at $62K.
In 2018, CIBC surveyed 1,532 adults in different age groups. The results show how unprepared many Canadians are for retirement. The results are telling:
5% of all respondents had the savings they thought they would need.
After years of discussion surrounding demographics, savings rates and our aging population, CPP contributions are increasing significantly over several years. The Canada Pension Plan (CPP) enhancement started in 2019.
The government is phasing in higher contributions over five years, from 2019 to 2023. The goal is to replace a third of average work earnings up to a ceiling, instead of the current 25%. Benefits will rise very modestly at the same time.
Doug Runchey is a CPP and Old Age Security legislation expert. In an article on retirehappy.ca, he sums up what's good and not so good about the CPP enhancement program:
In 2019, the maximum pensionable earnings ceiling is $57,400. If you are self-employed, the contribution rate increases by 0.3%, to 10.2% of your net business income (9.9% for the original CPP, and 0.3% for the CPP enhancement). In the case of employees and employers, each contributes 5.10%. That's a 0.15% increase compared to 2018. The maximum contribution for 2019 is $2,748.90 for employees and employers and $5,497.80 for the self-employed. Income below $3,501 or above $57,400 isn't subject to CPP contributions.
If you're self-employed and for example, you earn $85,000, your contribution will increase from $5,188 in 2018 to $7,402 in 2023 (a 30% increase). In 2024, you'll pay an extra $376. Finally, in 2025, you'll contribute an additional $776, bringing your maximum to $8,554 (a 39% increase in 6 years).
The tables below illustrate the expected increases in maximum contributions and benefits. If you are 5-10 years away from retirement, the extra contributions will add very little to your CPP benefits, and even less if you're not at the maximum, like many Canadians.
Approximate increase in monthly age-65 retirement CPP benefit
Year of earnings Maximum amount of increase 2019 $1.44 2020 $2.89 2021 $4.81 2022 $7.21 2023 $9.62 2024 $12.30 2025 and after $14.98
YEAR Contribution employee & employer Contribution self-employed Estimated earnings ceiling Estimated max. yearly contribution employee/employer Estimated max. yearly contribution - self-employed 2018 4.95% 9.9 % $55,900 $2,594 $5,188 2019 ** 5.1% 10.2% $57,400 $2,749 $5,498 2020 5.25% 10.5% $60,100 $2,972 $5,944 2021 5.45% 10.9% $61,900 $3,183 $6,366 2022 5.7% 11.4% $63,700 $3,432 $6,864
** Year 1 of enhancement
Phase 2 of the CPP enhancement hits in 2024 and 2025. It affects people whose income falls within a second, higher income range. Their extra contribution will be 4-8% of earnings above the first ceiling for salaried workers or self-employed, respectively.
For a self-employed person who earns $72,400 or more in 2024, the maximum additional contribution will be $376. In 2025, the income ceiling shifts to $79,400, with a maximum additional contribution of $776.
For examples and more information, check out the CRA's exhaustive backgrounder on the CPP enhancement.
Once the CPP confirms your application, you can expect payment of CPP and Old Age Security benefits monthly.
The maximum CPP benefit in 2019 is $1,154.58 per month or $13,854.96 for the year.
Here are the OAS and Canada Pension Plan payment dates in 2019:
Retirement is financially challenging for many, and not only for people with low income. If you and your spouse made enough (about $65,000 each in 2019) to receive maximum CPP and OAS benefits at retirement, would you be able to live on roughly $30,000 in benefits? That's less than a quarter of your earnings before retirement.
If you didn't have any savings or property to sell, your lifestyle would have to change drastically. For most Canadians, CPP and OAS benefits in retirement will only replace a small portion of their income. Most of us will need RRSP, TFSA and property assets to fund our retirement. If you haven't already, visit your bank branch or go online to get a free retirement plan. This way, you‚Äôll have some idea of whether your present course will make those retirement years golden or not.