Tag Archives: YMPE

Your guide to upcoming CPP changes

In June 2016 federal, provincial and territorial finance ministers finally reached an agreement to expand the Canada Pension Plan. However, because the changes will be phased in over an extended period, there has been considerable confusion among many Canadians about how both CPP contributions and benefits will increase, and who the winners and losers will be.

The Globe and Mail reports that an expanded CPP is designed to address the shortfall in middle-income retirement planning that is occurring as a result of disappearing corporate pensions. “Most at risk are workers under the age of 45 with middling incomes – say, families earning about $50,000 to $80,000 a year,” note authors Janet McFarland and Ian McGugan. “Without the defined-benefit pensions that their parents enjoyed, many could hit retirement with little in savings.”

Here is what you need to know about the planned CPP changes.

Effects on CPP retirement pension and post-retirement benefit:
Currently, you and your employer pay 4.95% of your salary into the CPP, up to a maximum income level of $55,300 a year. If you are self-employed you contribute the full 9%.

When you retire at the age of 65, you will be paid a maximum annual pension of $13,370 (2017) under the program if you contributed the maximum amount each year for 40 years (subject to drop out provisions). People earning more than $55,300 do not contribute to CPP above that level, and do not earn any additional pension benefits.

The first major change will increase the annual payout target from about 25% of pre-retirement earnings to 33%. That means if you earn $55,300 a year, you would receive a maximum annual pension of about $18,250 in 2017 dollars by the time you retire — an increase of about $4,880/year (subject to the phase in discussed below).

The second change will increase the maximum amount of income covered by the CPP (YMPE) from $55,300 to about $79,400 (estimated) when the program is fully phased in by 2025, which means higher-income workers will be eligible to earn CPP benefits on a larger portion of their income.

For a worker at the $79,400 income level, CPP benefits will rise to a maximum of about $19,900 a year (estimated in 2016 dollars). Contributions to CPP from workers and companies will increase by one percentage point to 5.95% of wages, phased in slowly between 2019 and 2025 to ease the impact. The federal finance department says the portion of earnings between $54,900 and $79,400 will have a different contribution rate for workers and employers, expected to be set at 4%.

The enhancement also applies to the CPP post-retirement benefit. If you are receiving a CPP retirement pension and you continue to work and make CPP contributions in 2019 or later, your post-retirement benefits will be larger.

Impact on CPP disability benefit/survivor’s benefit
The enhancement will also increase the CPP disability benefit and the CPP survivor’s pension starting in 2019. The increase you receive will depend on how much and for how long you contributed to the enhanced CPP.

Impact on CPP death benefit
There is currently a one-time lump sum taxable death benefit of $2,500 for eligible contributors of $2,500. This amount will not change.

The main beneficiaries of the CPP changes will be young employees, who are less likely to have workplace pension plans than older workers. To earn the full CPP enhancement, a person will have to contribute for 40 years at the new levels once the program is fully phased in by 2025. That means people in their teens today will be the first generation to receive the full increase by 2065.

The recently released Old Age Security report from chief actuary Jean-Claude Ménard which includes the GIS illustrates how higher CPP premiums scheduled to begin in 2019 will ultimately affect the OAS program.

The report reveals that because of the planned CPP changes, by 2060, 6.8% fewer low-income Canadians will qualify for the GIS, representing 243,000 fewer beneficiaries. This will save the federal government $3-billion a year in GIS payments.

In other words, higher CPP benefits mean some low income seniors will no longer qualify for the GIS, which is a component of the Old Age Security program. The GIS benefits are based on income and are apply to single seniors who earn less than $17,688 a year and married/common-law seniors both receiving a full Old Age Security pension who earn less than $23,376.

Also read: 10 things you need to know about enhanced CPP benefits

Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

10 things you need to know about enhanced CPP benefits

By Sheryl Smolkin

Well, the earth moved and in late June at a meeting of provincial/federal finance ministers, Bill Morneau got the consensus he needed from eight provinces including Saskatchewan for the phase in of modest enhancements to the Canada Pension Plan. As a result Ontario has agreed to shelve its plans for a home-grown Ontario Registered Pension Plan.

The feds plan to start collecting higher premiums beginning January 1, 2019. Many details still have to be ironed out, but here are 10 things you need to know about how enhanced CPP benefits will impact both employers and employees.

  1. The Canada Pension Plan Act says that once a sufficient number of provincial governments have indicated support, the federal government can move forward and lock in the reform with an Order in Council—no new Parliamentary debate or legislation is required. From that point forward, the expansion will be fixed in place unless amended through a subsequent agreement of two-thirds of provinces to reverse the expansion—which is very unlikely.
  2. If you are already retired or close to retirement you will not benefit from the changes. Someone retiring in 2020 who made one year of the increased contribution would get a tiny amount. Someone retiring in 2030 would have 10 years of extra contributions.
  3. Canadians who work a full 40 years will see their benefits increase (in 2016 dollars) to a maximum of $17,478 instead of $13,000. Therefore the replacement rate will inch up from 25% of the Year’s Maximum Pensionable Earnings (YMPE) to one-third.
  4. The maximum amount of income subject to CPP will increase 14%  from $54,900 this year to $82,700.
  5. Increased premiums of one percent will be phased in over seven years beginning in 2019. That means depending on the income levels of individual Canadians, up to $408 will come off their pay cheques.
  6. The refundable tax credit known as the federal working income tax credit will be expanded to help low-income Canadians offset the increase in premiums.
  7. Changes will not impact RRSP (and SPP) contribution room.
  8. To avoid increasing the after-tax cost of the added premiums, Ottawa will provide a tax deduction for the additional contributions rather than a tax credit.
  9. Company pension plans are not always offered – particularly Defined Benefit plans. Therefore it makes sense that young people and mid-career employees will benefit.
  10. Participation is mandatory and from the limited information released to date, it appears that even companies that do have a pension plan will have to make additional contributions and their employees will not be exempt.

How much will I get from CPP?

By Sheryl Smolkin

A pension from the Canada Pension Plan (CPP) is an important foundation on which most Canadians will build their retirement income. Therefore it is important to understand how much you will be entitled to at retirement.[i]

The maximum monthly amount you can receive if you retire at age 65 in 2015 is $1,065. Service Canada reports that in October 2014 the average pension for new beneficiaries was $610.57. That’s because applicants only got a full pension if they contributed the maximum amount up to the Yearly Maximum Pensionable Earnings (YMPE) for at least 40 years between ages 18 and 65.

The YMPE in 2014 was $52,500 and it increased to $53,600 in 2015. Therefore this year the maximum CPP contribution for both employers and employees is $2,479.95. Self-employed people must remit up to $4,959.90. If you earn more than the YMPE you will notice a “salary bump” part way through the year once you have made maximum CPP (and Employment Insurance) contributions.

CPP offers protection against periods where you had reduced or zero earnings for general reasons (up to eight years) or child-rearing  by automatically dropping a number of months of your lowest earnings when calculating your CPP benefit. You can start collecting CPP at age 60 but your annual pension will be reduced by .58% per month prior to age 65 (rising to .6% per month in 2016). If you take an early CPP pension and go back to work, you must continue to pay into the plan until at least age 65. CPP contributions for working Canadians over age 65 are optional until age 70.

When you are already receiving a CPP pension, contributions between ages 60 and 70 increase your benefit by a lifetime Post-Retirement benefit (PRB). The maximum annual PRB you can earn in 2015 is $319.56 and it will be added to your benefit payments in the next year.

CPP uses a Statement of Contributions to keep a record of your pensionable earnings and your contributions to the Plan. The Statement of Contributions can assist you in your retirement planning.

Your statement shows your total CPP contributions for each year and the earnings on which your contributions are based. If you contributed the maximum there will be a letter “M” beside the year. In addition, it provides an estimate of what your pension or benefit would be if you and/or your family were eligible to receive it now.

You can view and print a copy of your Statement of Contributions online. You will need to request a Personal Access code that will be sent to you by mail.

You can also request a hard copy of your statement from:
Contributor Client Services
Canada Pension Plan
Service Canada
PO Box 9750 Postal Station T
Ottawa ON K1G 3Z4

Table 1: CPP Contributions and Benefits

CPP 2014 2015
CONTRIBUTION AND BENEFIT LEVELS
Year’s Maximum Pensionable Earnings $52,500.00 $53,600.00
Contribution Rate – Employee/Employer 4.95% 4.95%
Maximum Contribution – Employee/Employer $2,425.50 $2,479.95
Year’s Basic Exemption $3,500.00 $3,500.00
Pensionable Earnings* $49,000.00 $50,100.00
RETIREMENT BENEFIT MAXIMUM
Monthly pension on retirement during the year at age 65 $1,038.33 $1,065.00
OTHER BENEFIT MAXIMA
Monthly Survivor’s Benefit
Spouse age < 65 $567.91 $581.13
Spouse age = 65 $623.00 $639.00
CPP Flat Rate Component:
Survivor’s Benefit
$178.54 $181.75
Monthly Disability Benefit
Maximum $1,236.35 $1,264.59
Flat rate component $457.60 $465.84
Lump Sum Death Benefit $2,500.00 $2,500.00
Deceased/Disabled Contributor’s Child Benefit $230.72 $234.87
INDEXATION RATE 0.9% 1.8%

* This figure represents the Year’s Maximum Pensionable earnings minus the Year’s Basic Exemption.

Also read How to Calculate Your CPP Retirement Pension

[i] Disability benefits and survivor benefits are also payable from CPP. See Table above.