What CPP expansion means to you

Posted on June 22, 2016 in Social Security Policy Context

TheStar.com – Business/PersonalFinance/Retirement – After a decade of trying, Canada’s finance ministers have agreed to expand the Canada Pension Plan.
June 21, 2016.   By ADAM MAYERS, Personal Finance Editor

After a decade of trying, Canada’s finance ministers reached a historic consensus Monday to expand the Canada Pension Plan.

The agreement, signed by federal finance minister Bill Morneau and eight of his provincial counterparts, provides for the first substantive change to our national retirement scheme since its creation by Lester B. Pearson in 1965. It also means that Ontario’s go-it-alone scheme, which pushed pension reform onto the national stage, is dead.

Instead, by 2019, all working Canadians will be paying into an expanded CPP in return for a bigger future benefit.

The deal recognizes that the time has finally come to do something about retirement security.

Everyone will pay more.

Everyone will get more.

In an interview Monday night, Ontario finance minister Charles Sousa said he was proud to be a part of the meetings that took place in Vancouver over the weekend. It was an occasion where regional differences were set aside to create something of greater national consequence.

“We came up with an affordable, universal plan,” Sousa said. “It was nation building that happened here. It was bigger than today. It was all about tomorrow.”

It will be another 2 ½ years before any changes take place. Many details are still to be worked out.

But here are answers to basic questions about the deal:

What did the ministers agree to do?

They agreed to a gradual expansion of the Canada Pension Plan. Premiums will rise in steps over seven years, starting in 2019. “Gradually” is the key word. Canadians will graduallypay more and gradually get more.

Currently, employers and employees each contribute 4.95 per cent of income on salaries between $3,500 and $54,900. In 2019, the contribution rate starts rising until it hits 5.95 per cent five years later.

The agreement increases the upper income limit by 50 per cent to $82,700 by 2025.

Another key change is that the current CPP is meant to replace 25 per cent of earnings up to the $54,900 ceiling. The new plan will replace one third of income up to the higher ceiling.

How much are pensions going up?

The maximum CPP pension in 2016 for someone retiring at age 65 is $13,110. That is based on maximum earnings for CPP purposes of $54,900.

The Department of Finance says that under the new scheme, at maturity, a Canadian earning slightly less — $50,000 in constant earnings throughout a working life — would receive a yearly pension of $16,000.

That compares with the current maximum of $12,000 at that income level.

Bear in mind that “at maturity” is a euphemism for about 40 years of work. And few people get the maximum. The average CPP pension is about 60 per cent of the maximum amount.

Will the changes affect RRSP room?

No, according to Sousa. And in order 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.

Will it be compulsory?


Who pays what?

Employees and employers will continue to pay equally at the 4.95-per-cent rate. The self-employed continue to pay both portions.

When will I start paying more?

On Jan. 1, 2019. An employee earning $55,000 a year in 2019 will see an increase in monthly premiums of $7 a month, The Canadian Press reported. At that income level, the premium rises by another $7 a month in each of the next five years.

This earner will pay $420 more annually by then.

For those earning above that, there is another two years of phase-in.

How much more will I get?

Circumstances are different. It depends on how long you work and how much you make.

If I retire after 2019 will I get something?

Yes, but it isn’t clear how much. But someone retiring in 2020 having made one year of the increased contribution would get a miniscule amount. Someone retiring in 2030 would have 10 years of extra contributions.

Who benefits most?

Young people and those in mid-career. Fewer and fewer people entering the workforce are being enrolled in company pensions. So this measure adds income support for them. Time is on their side to let the money grow.

Those who are already retired will see nothing, those over 50, very little.

Sousa says that some years from now, when people look back, they may appreciate this week’s achievement better.

“In the 1960s, when they were putting CPP in place, it was tough slogging. But today it’s not a question of should we have CPP, but, ‘My God, what if we didn’t have it.’ ”

It’s hard to disagree with that.

This makes the enhancement all the more important.

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One Response to “What CPP expansion means to you”

  1. jeff Vito says:


    The article I read was entitled “What CPP expansion means to you” Several points sparked my attention: as most people my age are not thinking about retirement, let alone knowing or fully understanding what CPP actually means or how it will impact our lives. This past summer federal finance minister Bill Morneau and eight of his provincial counterparts reached a historic consensus by signing an agreement to expand the outdated Canada Pension Plan. The federal government has realized that the future of everyone’s retirement planning is important. Paving the way now means more money in our retirement years. Today, we start thinking about tomorrow, under this new agreement, the CPP premium rates will rise gradually over the next seven years starting in 2019. As it currently stands, employees and employers contribute 4.95% of income on salaries between $3,500 and $54,900. In 2019, the contribution rate will start to rise until it hits 5.95% years later. The upper income limit will be increased by 50 percent until it reaches the maximum of $82,700 by 2025. Someone who earns $55,000 a year will see an increase of $7 a month effective January 1, 2019. This will continue to rise for the next five years. Your pension entitlement will be based on individual circumstances such as how long you worked, and how much you made. People that retire after 2019 will receive very little increase in pension benefits; the young or people in mid-career will benefit the most from these changes due to the decline of company pension plans. Younger people have a longer horizon in the workforce so they are able to contribute to the growing pot for when they decide that it is time to call it a career. Another thing that made me think was whether these pension changes will affect the RRSP room? Although the additional premiums to the CPP plan are compulsory the changes will not affect an individual’s RRSP room. Hopefully, the tax deduction instead of the tax credit for the additional premiums paid will financially benefit people in every tax bracket. In conclusion, we may look back at this deal and say that it was a great deal for all Canadians or we might look back and say that we should have seen this coming and made arrangements before the baby boomers entered retirement.


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