The Expansion of the Canada Pension Plan

On June 20, 2016, Canada’s finance minister Bill Morneau and several provincial finance ministers announced their agreement in principle to enhance the Canada Pension Plan starting January 1, 2019. All Canadian provinces, except Manitoba and Quebec, executed this historic agreement in support of an expanded CPP.  Since then, Manitoba has agreed in principle to the expansion of the CPP and Quebec continues to remain part of the on-going discussions.  As a result, Canadians will receive more from the CPP in the future and it will mean the end of the Ontario Government initiative to establish the Ontario Retirement Pension Plan (“ORPP”).

The Ontario Liberals had always said that if the federal government would agree to expanding the CPP then the ORPP would not be needed.
“The Ontario Liberals had always said that if the federal government would agree to expanding the CPP then the ORPP would not be needed.” Faisal Siddiqi, Principal and Consulting Actuary, Wealth Practice Leader – Canada

So what’s new under the CPP?

Future CPP retirees will receive a higher pension.

Currently, the CPP pays (a) x (b) x (c), where:

(a) is 25%

(b) is the average of your best 5 year’s of earnings up to the 5-year average YMPE in the year of retirement. The YMPE stands for Year’s Maximum Pensionable Earnings and it serves as the annual limit on which contributions are collected up to and how benefits are determined. In 2016, the YMPE is $54,900.   For individuals retiring in 2016 the 5-year average YMPE is $52,440.

(c) is your average earnings ratio, which is a fraction (between 0.0 and 1.0). This fraction represents the average of your earnings over the period of time you contribute to the CPP to the YMPE each year. If you have worked consistently between the ages of 25 and 65, and your earnings have always been more than each year’s YMPE, your ratio is 1.0. For most Canadians, this ratio is between 0.40 and 0.60 since not everyone works each year and not everyone earns more than the YMPE each year. The CPP has drop-out provisions and other provision to account for low earning years, disabilities, raising children, etc.

Therefore, the maximum CPP pension in 2016 is 0.25 x $52,440 x 1.0 which equals $13,110 per year or $1,092.50 per month.

The enhanced CPP aims to increase 25% to 33 1/3% and to increase the maximum benefit from $54,900 to $82,700 by 2025. This will provide more pensions to everyone (going from 25% to 33 1/3%) and will cover earnings at a much higher level which would cover a large proportion of middle-income earners in Canada (those with earnings currently between $54,900 and $82,700).

Everyone will contribute more to the CPP.

Currently, CPP contributions are 4.95% of earnings between $3,500 and the YMPE for both employees and employers. In 2016, this amounts to $2,544.30. Under the enhanced CPP, the contribution rate is estimated to go up 1.0% to 5.95% for both employers and employees.

But, how soon will this happen? Finance Canada has announced that the benefit and contribution increases will happen over 7years starting January 1, 2019 as follows:

  • a 5-year contribution rate phase-in below the YMPE, followed by
  • a 2-year phase-in of the upper-earnings limit.

The 5-year phase in will look like:

Year                       Additional Employee Contribution (above 4.95%)           Total Employee Contribution

2019                                       0.15%                                                                                                    5.10%

2020                                       0.30%                                                                                                    5.25%

2021                                       0.50%                                                                                                    5.45%

2022                                       0.75%                                                                                                    5.70%

2023                                       1.00%                                                                                                    5.95%

The 2-year phase-in will look like this:

Year                       Expected YMPE                 YMPE Jumps To           Increase in YMPE

2024                       $70,100                                $74,900                                 7%

2025                       $72,500                                $82,700                                 14%

There will be some concessions to alleviate the increases.

Finance Canada has also announced an enhanced Federal Working Income Tax Benefit to offset the impact of the increased contributions on low-income employees and a tax deduction of employee contributions associated with the enhanced portion of the CPP in order to avoid increasing the after-tax cost of savings for Canadians.

Remember, expanding the CPP requires agreement by at least two-thirds of the provinces representing two-thirds of the population. The agreement is expected to be met since Alberta, British Columbia, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Saskatchewan, and Manitoba are on board.

The ORPP saga comes to an end.

As a result of the CPP Expansion, the Ontario Government played its get of jail free card and cancelled the ORPP, thereby ending the plan and all the work that had been put into it. The Ontario Liberals had always said that if the federal government would agree to expanding the CPP then the ORPP would not be needed.

This will come as a relief to many employers who were looking into implementing comparable DC plans where they only had Group RRSPs, or re-designing their current DC plans prior to January 1, 2019.  The cancelling of the ORPP also relieves the Ontario Government of a large regulatory and industry process to get the plan up and running, registering employers, and collecting contributions.

Employees, for their part, will be better off under an expanded CPP, since it is nationwide and not provincial, and provides a better benefit though a little less generous than the planned ORRP additional pension.

Your turn: Is the expanded CPP going to help more working Canadians retire with financial security? Use the comment box below to share your thoughts.

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