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Last updated: June 28 2016
Proposed CPP Enhancements: A BIG Hit for Proprietors
Recently, federal and provincial finance ministers met to discuss enhancements to the Canada Pension Plan. Here’s what’s going to change and when.
The goal was to increase the pension available to the current generation of workers from the current 25% of pensionable earnings to 33% of pensionable earnings. The current maximum annual pension of $13,110 represents approximately 25% of the current maximum pensionable earnings. If the benefit increase were to be applied today, the new maximum benefit would be approximately $17,480 annually, or $1,456 per month.
Of course, in order to fund this increase in CPP pension benefits, the premiums paid into the plan will also have to rise. According to the plan, the premium rate will increase annually over the period 2019 to 2023. Then, in 2024, the basic rate will remain the same but an additional premium will be required on the next $4,800 over the maximum pensionable earnings. In 2025 that premium would be on the first $10,200 over the maximum pensionable earnings. The premium rate on these enhanced pensionable earnings will be 4%. This additional premium would be paid by both the employer and the employee. The additional premiums will be tax deductible (rather than a non-refundable credit). Self-employed individuals will, of course, have to pay both the employer and employee premiums.
The following table shows the projected premiums to the year 2025.
|
Year |
Regular |
Proj. Max. |
Max. Reg. |
Additional |
Max. |
Add. |
Add. |
Total |
Max. |
||
|
2018 |
4.95% |
$58,000 |
$2,697.75 |
$58,000 |
0% |
$2,697.75 |
$5,395.50 |
||||
|
2019 |
5.10% |
$59,700 |
$2,866.20 |
$59,700 |
0% |
$2,866.20 |
$5,732.40 |
||||
|
2020 |
5.25% |
$61,500 |
$3,045.00 |
$61,500 |
0% |
$3,045.00 |
$6,090.00 |
||||
|
2021 |
5.45% |
$63,500 |
$3,270.00 |
$63,500 |
0% |
$3,270.00 |
$6,540.00 |
||||
|
2022 |
5.70% |
$65,600 |
$3,539.70 |
$65,600 |
0% |
$3,539.70 |
$7,079.40 |
||||
|
2023 |
5.95% |
$67,800 |
$3,825.85 |
$67,800 |
0% |
$3,825.85 |
$7,651.70 |
||||
|
2024 |
5.95% |
$70,100 |
$3,962.70 |
$4,800 |
$74,900 |
4.00% |
$192.00 |
$4,154.70 |
$8,309.40 |
||
|
2025 |
5.95% |
$72,500 |
$4,105.50 |
$10,200 |
$82,700 |
4.00% |
$408.00 |
$4,513.50 |
$9,027.00 |
||
*Self-Employed Premium (both employer and employee portions)
The proposed rate increase is yet to be verified by actuarial assessment.
The increased premiums will be used to fund the increase from one-quarter of pensionable earnings to one-third. Enhanced benefits are expected to accrue starting in 2019, but a full two-thirds of income replacement will not occur until the worker has contributed for 40 years. Thus, those currently approaching retirement will see no increase in their pensions.
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Taxpayers who earn more than the maximum pensionable earnings after 2023 and pay the additional premiums on the pensionable earnings over the maximum will earn additional pension credits and will be entitled to a larger pension when they retire.
As low-income workers will be paying additional premiums under this plan starting in 2019, the Working Income Tax Benefit is to be enhanced to offset the additional costs to these workers.
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